Consumers and businesses will benefit from the new guidelines on
predatory pricing released on July 21, 2008 by the Competition
Bureau. The guidelines recognize that low pricing policies usually
have positive effects for consumers. To ensure that businesses are
not deterred from pursuing aggressive pricing policies, the Bureau
has provided five important signals:
The Bureau intends to use the reviewable practice of abuse of
dominance instead of the criminal provisions of the Competition
Act to deal with predatory pricing in all but the most
egregious cases (e.g. where predatory pricing is used to enforce or
invite participation in a cartel arrangement). Thus, the primary
enforcement mechanism will be prohibition or other remedial orders,
rather than fines or imprisonment.
The assessment of whether a price is below cost or unreasonably
low will be based on average avoidable cost (i.e., costs that the
business could have avoided had it chosen not to sell the product
in question). This approach is consistent with modern economic
thinking and removes the uncertainty in prior guidelines about
potential enforcement action when prices were between average
variable and total cost.
Price matching to meet competition will now be accepted as a
reasonable business justification for pricing below cost.
Historically, there had not been any explicit recognition of a
"meeting competition" defence.
The Bureau has accepted that the expectation of and ability to
recoup losses through future price increases is a fundamental
element of predatory pricing (contrary to the 2002 draft
guidelines' position that it was merely a potential factor that
could be considered).
The Bureau also expects complainants to provide evidence of
unprofitability during the time period of price reductions.
Overall, the guidelines are a positive development. The Bureau
recognizes that aggressive pricing usually has positive effects for
consumers. These guidelines signal the Bureau's intention to be
gentle on aggressive pricing, except where it is so flagrant that
it could constitute criminal behaviour.
Guidance on the criminal predatory pricing provisions of the
Competition Act was first provided by the Bureau in 1992.
While they adopted a relatively restrained approach, various
uncertainties remained and were intensified by draft guidelines on
unreasonably low pricing policies which appeared to signal a more
interventionist posture on issues such as recoupment and paralleled
a high profile case against Air Canada that was eventually
abandoned. The Bureau's approach in the new guidelines is a
welcome return to and improvement upon the 1992 guidelines.
The Bureau has adopted a two stage test for determining whether
to proceed on predation complaints that is consistent with the US
Supreme Court's decision in Brooke Group Ltd. v. Brown
& Williamson Tobacco Corp:
The Bureau will examine whether the business engaging in the
pricing conduct has, or is likely to obtain, market power. In the
context of predation the Bureau states that the ability to recoup
losses following predatory pricing is a good indicator of market
If the firm does possess market power, then the Bureau will
conduct a cost revenue analysis to determine whether its prices are
below the average avoidable cost.
The Bureau has not brought a predatory pricing prosecution since
2003 and the guidelines provide welcome assurance for businesses
that are considering low pricing strategies. However, the
guidelines do not bind the courts and the Bureau's restrained
approach may encourage complainants to make greater use of the
private right of action that is available to market participants
(including competitors) who are injured when a firm charges prices
that are unreasonably low with the intent or likely effect of
lessening competition substantially or eliminating a competitor.
Thus a low pricing policy still needs to be carefully considered in
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
The Canadian Competition Bureau issued a template document for use as a form of Consent Agreement, to be filed with the Competition Tribunal to resolve concerns the Bureau may have with proposed mergers.
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