Predatory Pricing

Executive Summary

In Canada, the Competition Act was initially created in 1889 with the Predatory Pricing Statute arising in the mid-1930s. To date, there have been hundreds of claims of predatory pricing brought to the Director. However, very few have gone through an investigation and just a handful, were taken to the Courts.

One of the explanations for the small number of cases related to the act of predatory pricing, is the difficulty in proving that a firm has lowered their prices to "unreasonably low" in an attempt to drive their competition from staying or entering their market.

Predatory pricing should not be considered to be a rare occurrence just because of the minimal number of cases that are brought forward to the Attorney General. Rather, the act of predatory pricing should be more clearly defined or revised under the Competition Act.

Many studies and papers issued by the Competition Bureau and other institutions demonstrates that has been a significant amount of research in recent years with the intention of developing guidelines that will help avoid predators while improving enforcement policies.

Introduction

The Competition Act

"1.1 The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices."

This study is an examination of one type of anti-competitive pricing practice regulated under the Competition Act, predatory pricing. This study focuses on the criteria needed to identify the anti-competitive aspects of predatory pricing and the legal elements of doing so.

The original Competition Law was entitled An Act for the Prevention and Suppression of Combinations Formed in Restraint of Trade and was passed in 1889, being the first of its kind anywhere in the world . The Competition Act is a federal law which governs business conduct in Canada. The Competition Act was initially designed to preserve and enhance the process of competition in all industries with the intention of treating all competitors equally. The purpose of the Act is to promote competition and efficiency in the marketplace in order to encourage Canadian companies to become more efficient and better able to compete in Canada and abroad.

The Competition Act applies to almost all businesses in Canada - big, medium or small-size, and covers criminal offences and civil law matters.

The Competition Bureau (part of Industry Canada) is a federal agency that enforces the Competition Act. The Chief Executive Officer of the Bureau is the "Director of Investigation and Research". The Director's role is to supervise investigations and inquiries into alleged criminal violations or conduct.

The Competition Bureau's role is to examine the complaint and identify whether or not it falls under the Competition Act. If it does, the Bureau may contact other consumers or competitors to obtain more information. If there is enough evidence to support a breach of the Competition Act, a formal inquiry may be initiated. Inquiries are conducting privately but if someone has important evidence about an offence under the Competition Act, that person may be asked to testify if the matter continues to court or before the Competition Tribunal. The Competition Tribunal is independent of the government and is chaired by a judge. The

In criminal law matters, cases are referred to the Attorney General of Canada for possible prosecution before the criminal courts. Civil law matters are referred to the Competition Tribunal.

According to a study conducted by Blake, Cassels & Graydon LLP , the primary method of enforcing defiance of the Competition Act in Canada has been by criminal sanction under Part VI of the Competition Act. The general criminal offence includes conspiracy, combination, agreement or arrangement which prevents or limits competition excessively. If convicted, the penalty can be imprisonment for up to 5 years and/or a fine not to exceed $10 million per offence. Under the Competition Act, there are several trade practices that are prohibited including price discrimination (the offence of failing to provide similar pricing terms and conditions to competing wholesalers or retailers for equivalent volume sales at an equivalent time) , and predatory pricing (the offence of setting unreasonably low prices to eliminate competition) . Bid-rigging, pyramid selling schemes, deceptive telemarketing, double ticketing and price maintenance practices are also prohibited.

Over time, Canada's competition law has been revised to reflect the modern times. According to Susan Whelan, M.P. and author of "Interim Report on the Competition Act",

"At this time, Canada can stand proud of its Competition Act; it is an effective law that balances the interests of consumers in obtaining high quality goods and services at competitive prices with the interests of the commercial actors in being free to forge and pursue their business plans and strategies unencumbered by government dictate."

However, this doesn't necessarily mean that there's no need to make some changes to the current law. This report will focus on the practice of predatory pricing and research that has been done to initiate changes in the current law.

Predatory Pricing

"Section 50(l)(c) of the Competition Act prohibits predatory pricing. It is an offence to engage in a policy of selling products at prices unreasonably low, having the effect or tendency of substantially lessening competition or eliminating a competitor or designed to have such effect."

Predatory pricing can be described as a situation where a firm that dominates the market, charges comparably low prices over a long period of time, forcing the competition away from the market or deterring any new entrants into the market. Once the competition has weakened, the firm or predator increases the prices in order to recover the costs incurred (i.e. from its losses or lost profits).

Consumers may reap the benefits over a short period of low pricing, however, once the prices go up, consumers will be hit with the increased costs during the period of recoupment of the