INST Committee Report

       The interplay between the process of competition and competition policy and law is an interesting one. Competition is a means to an end, not an end in itself. We have competition so the business sector can deliver the best combination of products at the best prices to consumers. The best deal a consumer can receive comes from a free and open market, one with as few barriers to entry by new competitors and as few exit barriers,² including government-imposed barriers such as product, investment or trade regulations.³ Indeed, certain government policies other than competition policy deliberately or inadvertently restrict competition, and competition policy (although sometimes controversial) is required to restore some sort of balance. However, even in the absence of government-imposed barriers, unfettered competition alone may not be enough. A complementary competition law is required in circumstances where, owing to technological barriers, competition will not automatically and immediately flourish.      

[T]here’s a need for something to be said about competition policy being broader than simply the competition law. There’s a need to extend our competition policy to address the broader range of federal, provincial, and municipal government restraints to competition. In aggregate, these have a far greater adverse impact on consumers, small businesses, and large businesses in Canada than all private restraints combined. [Paul Crampton, Davies, Ward, Phillips & Vineberg, 59:11:20]

          This interdependence of the process of competition and competition policy also runs in the opposite direction when governments adopt policies that, deliberately or inadvertently, foster competition. For example, trade liberalization provided by the Canada-United States Free Trade Agreement (FTA), followed by the North American Free Trade Agreement (NAFTA), was not only good trade policy, but also good competition policy. The deregulation and privatization of key industrial sectors of the economy, while proving controversial as an industrial policy, has in general been good competition policy.

        Regulated markets, or deregulated markets where the proper institutions for fostering competitive entry are not put in place in the transition period, can also distort a competition policy regime. Indeed, twisting the competition law to accommodate an anticompetitive regulatory environment is likely to compromise and even corrupt competition law. In the 1980s, Canadians witnessed the intervention of their competition authorities in what otherwise might have been an efficiency-enhancing merger of dairies (Palm Dairies Ltd.) because of production quotas and interprovincial trade barriers that limited competition in the downstream sector. In the 1990s, Canadians again witnessed their competition authorities intervening in book retailing (the merger of SmithBooks and Coles Book Stores Ltd. in 1995 to form Chapters Inc. and in 2000 with the merger of Chapters and Indigo) because of entry barriers that were built by government-imposed ownership restrictions. Today, Canadians are witnessing the enactment of “special rules for a special industry” — the air carrier services industry — into a framework law, as a result of the absence of a suitable deregulatory framework.

An Optimized Competition Framework

       Any competition framework, if it is to improve consumer welfare and economic efficiency, must incorporate the most up-to-date economic analysis. There is, nevertheless, considerable room to manoeuvre in the choice of framework. Competition law usually reflects the country’s culture, business customs, legal history, political philosophies, as well as its geographic size and demographic makeup.

       For example, the United States antitrust agency — the U.S. Federal Trade Commission — begins to get tough on mergers at much lower levels of industrial concentration than does Canada’s Competition Bureau. This approach is taken because in the much larger U.S. economy, there is much less risk that firms will not achieve the necessary economies of scale and scope to be efficient. Furthermore, Canada’s competition legislation is unique in that it provides an efficiencies defence which explicitly requires that the review of a merger balance the anticompetitive effects against the “gains in efficiency.” Whichever of the two impacts is greater determines the merger proposal’s acceptability or unacceptability.⁴ This provision appears to be more lenient than in the United States, where the efficiency gains must be so great that prices will not rise as a result of the merger. However, the Committee heard evidence to suggest that even Canada’s consideration of efficiencies is not adequate.    

I think the theme or principle behind the Competition Act, which is that competition as a process is going to generate tremendous benefits, is a valid one that applies across industry segments. [Tim Kennish, Osler, Hoskin & Harcourt, 59:09:55]

 [T]he Competition Act is intended to and should protect the competitive process, and it is intended to ensure market conditions where a good company … can survive and do well … it should not be protecting any individual company. [Donald McFetridge, Carleton University, 59:10:00]

[A]n open international trade policy is in many ways a better way of creating competition than through a legal enforcement of one’s own competition laws and, I should add, open foreign investment policy. [Roger Ware,
Queen’s University, 59:13:05]

There are at least two cases that have preoccupied the resources of the Competition Bureau and the Competition Tribunal in the last five years that might not have even been there had we had a more open, continent-wide approach to these industries. I’m referring, of course, to airlines and book retailing. [Roger Ware, Queen’s University, 59:11:35]

In general, we have this problem that when we move from regulation to deregulation, the regulator is involved, and it takes an active role in making sure that the right policies are in place to facilitate competition. We haven’t had that in airlines. I don’t think you should be looking for the Commissioner to save Canadian consumers … You should be looking at … Transport Canada. [Jeffrey Church, University of Calgary, 59:10:30]

The statute is still … an economically sophisticated law, and is recognized as such around the world. [Lawson Hunter, Stikeman Elliott, 59:10:50]

         Although the much smaller Canadian economy dictates a less vigilant merger enforcement framework than exists in the United States, it could be argued that Canada ought to have a more vigilant conspiracy enforcement framework than the United States to achieve similar levels of enforcement. This view follows from two realities: Canada is a smaller market that is more susceptible to technological barriers to competition; and its economy is subject to more government-imposed regulatory barriers to competition. As such, leniencies found in Canada’s merger review process can be made up elsewhere, for example, by having a more stringent provisions on: conspiracy, anticompetitive pricing practices, market restriction, tying and abuse of dominance. A careful balancing of factors is required to produce an optimal competition policy mix.

       Indeed, the needed balance can be a subtle one, particularly at the enforcement stage. For example, one witness appearing before the Committee in early 2000, a former Director of Investigation and Research at the Bureau of Competition Policy (as the title and the agency were known prior to the mid-1990s) said that not enough attention was paid to the significance of the consolidation going on in the refining sector in the oil industry in the 1980s. The Bureau allowed the consolidation to take place, and this development explains, in part, why we are today experiencing many problems in the downstream petroleum products sector.⁵ If this view is indeed correct, then the organizational structure of the oil industry may present an almost unsolvable competition problem, far too complex for the anticompetitive pricing provisions of the Competition Act. Yet, at the same time, the Committee recognizes that the government has and continues to work on improving this situation. In any event, this hypothesis, whether correct or not, confirms the importance of correctly crafting the competition framework — one that fits Canada’s unique economic circumstances.

I don’t think the system is irreparably broken. I think it is a system we can continuously improve … We should be doing that on an ongoing basis. [George Addy, Osler, Hoskin & Harcourt, 59:12:55] 

Certainly in 1986 we were able to hold up the at that time in a very proud manner and point to a number of aspects of the legislation that really did bring it to the attention of other jurisdictions. But one of the ongoing deficiencies continues to be section 45 … it is out of kilter in relation to hard-core, naked cartels. It’s out of kilter with other jurisdictions … [Calvin Goldman, Davies, Ward & Beck, 59:09:40]

       According to many competition policy and law experts, the above problem is more widespread than is generally perceived. Some witnesses immediately pointed to the newspaper and grocery retailing industries as examples. Whether right or wrong, these comments suggest that Canada may indeed have a less-than-optimal competition enforcement strategy than what is required by a small, regulated or mixed economy.

       Many competition law experts have three perennial criticisms of the Competition Act. First, Canada’s conspiracy law, relative to other countries, is ineffective due principally to overly restrictive wording found in the provision (section 45). Consequently, the Commissioner of Competition has a poor record in contested conspiracy cases relative to the competition authorities in other jurisdictions. Second, Canada’s conspiracy provision is both over-inclusive of some business arrangements in some circumstances and under-inclusive in others. In other words, the conspiracy provision is a very blunt instrument (see Chapter 4).Third, the Competition Bureau focuses its resources too heavily on merger review and too little on conspiracy enforcement.⁶

When you’re running an operation like that [Competition Bureau], you’re constantly worried about two things. You’re worried about … the “type one” errors, where you haven’t taken enforcement action when you should have. You’re also worried about the “type two” errors, where you have taken enforcement action in a benign case that may have caused narrow damage to those parties or a chilling effect on the marketplace. Dealing with those challenges in the environment we face in today’s business climate is very, very difficult. [George Addy, Osler, Hoskin & Harcourt, 59:13:00]

       With respect to the second inference — the right mix of enforcement priorities — one would think that a small economy such as Canada would have a less vigilant merger enforcement regime than a large country such as the United States, relatively speaking and holding overall competition objectives the same, for the reasons already stated; and exactly the opposite situation in terms of conspiracy enforcement. Yet if the above complaints are true, Canada either has an inappropriate mix of competition law enforcement for its particular circumstance, or it is simply more lax on competition matters than are other major industrialized countries. This position further suggests that those who heralded the Competition Act as a watershed advancement over that of the Combines Investigation Act were much more critical of the predecessor Act than is commonly understood. In any event, consensus opinion appears to support that Canada moved from having a relatively ineffective competition statute prior to 1986, due principally to the higher burden of proof associated with the Act’s criminal rather than civilly reviewable approach, to having one that, although more up to date in its economic content and legal treatment, is still somewhat misguided in a strategic sense. The Committee’s report will, therefore, devote its efforts to correcting this defect. We will propose reform to the conspiracy provision that will make it more effective. Upon such change, we want the Bureau to aggressively pursue conspiracies against the public. The Committee, therefore, recommends:

          The Competition Act is framework legislation; it applies to all industries in equal measure (except those monopolies created by the federal or provincial legislations). There are both good economic and legal reasons for this. The economic reasons are the long-standing belief that, by and large, free and open markets provide the best combination of products and services at the best prices to consumers. Except on occasion, when the Competition Act or some other (usually industry-specific) statute is needed, the process of competition disciplines suppliers in their decision making and thereby induces them to fulfil the needs of consumers in the most efficient manner. In the cut and thrust of competition, efficient firms survive and prosper, and inefficient firms fail and withdraw. The outcome of this dynamic is that only the interests of consumers and efficient suppliers are protected. The legal reasons are simply that, for constitutional reasons, most industries fall under provincial jurisdiction.

[A]s has been stated many times, the Competition Act is a statutory general application. I’m not sure it’s still true, with specific provisions now dealing with travel agents and so on, but I think it should be. [Tim Kennish, Osler, Hoskin & Harcourt, 59:09:55]

There are industries that warrant special treatment. To the extent that they are regulated, there is a principle of regulated conduct, which is somewhat uncertain in its operation. I think it would be helpful if there were clarification of its operation, but to the extent that an industry is regulated, it is withdrawn from the coverage of the Act. [Tim Kennish, Osler, Hoskin & Harcourt, 59:09:55]

      At least this was the case for 111 years of antitrust law in Canada. In 2000, however, the Government of Canada departed from this principle and adopted special provisions that armed the Commissioner with the extraordinary power to issue an interim injunction (section 104.1), or an interim cease and desist order as it is often called, against any air service provider, as defined in the Canada Transportation Act, to prevent any anticompetitive behaviour (predatory pricing, paragraph 50(1)(c), and abuse of dominant position, section 79). Bill C-23 would extend the duration of this order (beyond a maximum of 80 days if all renewals are put into effect) to allow for good faith, but belated information exchanges between the contesting parties; the bill would also subject an airline company guilty of such offences to an administrative penalty of up to $15 million. The government justifies these measures on the grounds of the current crisis in the competitive structure of the airline industry in Canada.

       Specialists in competition policy and law are not convinced by the government’s arguments. They claim many reasons why special airline provisions are not credible: (1) the crisis is partly of the government’s own making, the foreign ownership restrictions prevent competitive entry that would discipline Air Canada’s pricing behaviour, moreover, the government also failed to provide the proper institutional framework during the industry’s deregulatory transition period; (2) although the cost and pricing structures of airline services are prone to seasonal and other forms of price cutting to equilibrate demand and supply, possibly (but only rarely) leading to predatory price cutting, so are most other transportation services — rail, bus, cruise liners — that are conveniently handled by Canada’s transportation regulator, the Canada Transportation Agency; (3) the sheer dominance of Air Canada, with a market share exceeding 80%, is not out of line with that of incumbent local telephone and cable television companies that are currently being deregulated under supervision from the Canadian Radio-television and Telecommunications Commission (CRTC); and (4) the precedent these measures set for other industries seeking special treatment, namely the grocery and newspaper industries, is a slippery slope. These very compelling objections are not exhaustive.

Although every industry … is unique in some way, by and large the kinds of competition problems are fairly generic. You have problems of price fixing and you have problems of abuse of strong market position. You worry about mergers in any kind of industry, so in principle these problems come up or could come up in any industry. [Tom Ross, University of British Columbia, 59:10:15]

        In its Interim Report, the Committee sided against special provisions for the newspaper industry and suggested an alternative approach modelled on the special banking and financial services provider statutes. The Committee also suggested other ways of realizing the government’s stated objectives in providing the Commissioner with special interim cease and desist powers with respect to the airline industry — and with respect to all other industries, for that matter — through expanding Competition Tribunal powers under section 100 to cover abuse of dominance and predatory pricing provisions. This option would at least preserve the Act’s general application.

       Although the government has not responded to the Committee’s Interim Report, its decision not to revoke section 104.1, when Bill C-23 would generalize this power in the hands of the Competition Tribunal, suggests that other policy considerations are at work. For example, although the time required for the Commissioner to seek an interim order from the Tribunal may be quite short, this delay could, in some circumstances, be critical. In any event, the government appears adamant to any return to direct regulation of air services and fares or to unilateral free trade in air carrier services, and is steadfast in its decision to attempt to correct structural problems within the industry through the Competition Act.

       At this time, the Committee acknowledges that the special provisions related to the airline industry are temporary measures that will be removed when healthy competition is realized within the industry. At the same time, the Committee is deeply concerned that this expectation will be long in coming, as even the United States (with about ten times the population of Canada) appears to be able to sustain only five or six nationally hubbed airline companies. Without the removal of the ownership and cabotage services restrictions, the industry may be destined to dominance by Air Canada for a protracted period. As such, the Committee is apprehensive about the government’s move from a law of general application to one that includes special provisions for a specific industry when other equally effective options may be available through forward-looking reform. Moreover, the government’s current policy course is possibly undermining the credibility of Canada’s competition regime. Many competition specialists — including international organizations such as the Organisation for Economic Co-operation and Development (OECD) — are beginning to question the Competition Bureau’s independence from Parliament and government. The Committee will broach this issue in some detail in the next chapter.

I think this is very dangerous … turning this from framework legislation into a regulatory regime put in the hands of somebody who not only doesn’t have the resources but who, frankly, is very ill-equipped to deal with it. [Stanley Wong, Davis and Company, 59:11:30]

We have a scenario where we’re not quite at the framework model and we’re not into regulation, and we’re asking the Commissioner, in exercising his powers, to straddle the fence. [George Addy, Osler, Hoskin & Harcourt, 59:12:00]

[Y]ou either have to go in and regulate the business — and if you’re going to regulate it, you shouldn’t be regulating just Air Canada — or you’re going to have to stand back and say “This is a dynamic business … and the chips will fall where they may.” Unfortunately, at the moment we’re in this really untenable halfway house ... [Lawson Hunter, Stikeman Elliott, 59:10:30]

       In this report, the Committee will be proposing changes in the abuse of dominant position and predatory pricing provisions (respectively, section 79 and paragraph 50(1)(c)) that should satisfy the government, competition lawyers and economists, while providing balanced competition enforcement to the business community and the consuming public. These changes will permit the return of the Competition Act to law of general application, with no “special provisions for special industries.”