Canada: Bureau Issues Draft Unreasonably Low Pricing Guidelines

Sections 50(1)(b) and 50(1)(c) of the Competition Act provide that everyone engaged in a business

who...

is guilty of an indictable offence and liable to imprisonment for a term not exceeding two years.

Predatory pricing laws are generally considered to be an essential component of a competition law regime. Particularly in markets characterized by high entry barriers, it is critical that dominant market participants not be allowed to sell products at below cost for the sake of driving or keeping out competitors. Yet Sections 50(1)(b) and 50(1)(c) have had a problematic history. Both the courts and the Competition Bureau have had difficulty in distinguishing between aggressively low pricing policies, which are presumably the result of intense competition, and predatory pricing, which can eliminate competition. To date, there has been only one conviction obtained by the Bureau under Section 50(1)(c).

In March, the Bureau issued for comment draft Unreasonably Low Pricing Guidelines. These Guidelines are intended to replace the Predatory Pricing Enforcement Guidelines, which were issued by the Bureau in 1992 in an attempt to ensure that the public understood when low pricing might result in an investigation under the Competition Act. One might view the issuance of the new guidelines as an implicit admission that the original guidelines failed to meet their stated purpose, although the Bureau asserts that it is developments in economic thinking and in the economy at large which have prompted the Bureau to articulate a new enforcement policy.

The 1992 guidelines evaluated predatory pricing using a two stage approach. The first stage evaluated an alleged predator’s ability to exercise market power and recoup losses incurred as a result of a policy of predatory pricing. The second stage involved an assessment of whether the prices in question were below average variable cost, and therefore "unreasonably low". In the new guidelines, the Bureau declares that the ability to recoup losses will no longer be considered as the primary screening criteria.

Rather, it is properly to be considered as only one of many factors for determining whether or not anti-competitive pricing policies are in place.

In determining whether a seller’s prices are "unreasonably low", meanwhile, the Bureau proposes to replace the average variable cost test used in the previous guidelines with the test of "avoidable cost". The Bureau defines "avoidable cost" as being all costs that could have been avoided by a firm had it chosen not to sell a given product.

Regrettably, the changes in the Bureau’s approach do not simplify things for a businessperson who is uncertain as to whether his pricing policies will run afoul of Sections 50(1)(b) and 50(1)(c). The fundamental but complex question of whether an "unreasonably low" pricing policy will be considered by the Bureau or a court to have had the effect or tendency of substantially lessening competition, or the effect or tendency of eliminating a competitor, will remain. To answer this question, one must assess whether the pricing policy will create, preserve or enhance the seller’s market power", i.e., the seller’s ability to unilaterally influence price or other competitive factors. Assessing market power in turn involves determining the dimensions of the relevant market(s), and the market shares and levels of concentration in, and barriers to entry to, those markets.

These are all familiar concepts to competition lawyers. They are all dealt with in some detail in the Bureau’s Merger Enforcement Guidelines. The concepts are decidedly less familiar to businesspeople, and it is unlikely that the new guidelines will make them more so.

In fact, the new guidelines (presumably unintentionally) once again highlight the difficulty of applying complex economic concepts in a criminal law context. Ironically, the Bureau has on several occasions (most recently in a speech delivered by a Deputy Commissioner of Competition in May of this year) explicitly acknowledged this difficulty with respect to Section 45, the Competition Act’s conspiracy provisions. Those provisions make illegal agreements which lessen competition "unduly". Section 45’s broad language requires the same analysis of relevant market(s), market power, barriers to entry, etc., that is required under Sections 50(1)(b) and 50(1)(c). The Bureau has publicly acknowledged that the inability of businesspeople and the lawyers who advise them to determine quickly and definitively whether a given course of conduct will or will not run afoul of Section 45 has probably deterred entry into arrangements that cause no harm to consumers, or that are, in fact, pro-competitive. At the same time, the difficulty of applying a complex market-effects test in a criminal context has resulted in there being few convictions in contested conspiracy cases. The Bureau is therefore proposing that the Competition Act be amended to deal with most putatively anti-competitive agreements in a civil context, leaving only hard core cartels to be dealt with criminally.

The Bureau’s analysis of the problems associated with Section 45 can and should be applied to Sections 50(1)(b) and 50(1)(c). Unreasonably low pricing should be dealt with under the Competition Act’s civil provisions. Doing so will make it more likely that harmful pricing conduct will actually be acted upon.