Minister Flaherty has once again proven that the Competition Act is vulnerable to politically expedient amendments developed to respond to perceived exploitative conduct. Following on statements in the 2013 Throne Speech, Minister Flaherty indicated in the 2014 Budget that the government will introduce legislation to address geographic price discrimination “that is not justified by higher operating costs in Canada, and to empower the Commissioner of Competition to enforce the new framework.” While Canadians will not know what this really means until the proposed legislation is disclosed, the language in the 2014 Economic Action Plan suggests the Commissioner of Competition may become a price regulator in addition to its role as enforcer of Canada’s competition law.
The 2014 Budget tabled in Parliament on February 11 states that the Harper government:
"proposes to address another source of the price gap identified by the Senate Committee: country pricing strategies—that is, when companies use their market power to charge higher prices in Canada that are not reflective of legitimate higher costs. Evidence suggests that some companies charge higher prices in Canada than in the U.S. for the same goods, beyond what could be justified by higher operating costs. Higher prices brought on by excessive market power hurt Canadian consumers.
The Government intends to introduce legislation to address price discrimination that is not justified by higher operating costs in Canada, and to empower the Commissioner of Competition to enforce the new framework. Details will be announced in the coming months."
It is not clear whether the objective of the new legislation is to address
the U.S.-Canada “price gap” (i.e. higher prices paid by Canadians compared with prices paid by U.S. consumers for identical goods after adjusting for the exchange rate and sales taxes), when the higher Canadian prices are not justified by legitimate higher operating costs;
price gaps only where the Canadian firm charging the higher price for the good in Canada has market power in Canada; or
“higher prices brought on by excessive market power” generally, presumably measured against some benchmark price.
It is also not clear how the Commissioner of Competition will determine when price discrimination is or is not justified by legitimate higher operating costs, what the appropriate measure of “cost” should be (which can be an extremely complex issue, as illustrated by the jurisprudence dealing with predatory pricing), or how temporary such decisions will be, given that market conditions affecting a supplier’s operating costs may change frequently so that price discrimination that may not be justified today may be justified tomorrow.
Commencing in 2011, the Standing Senate Committee on National Finance undertook a two-year investigation into the price gap issue between Canada and the United States, and considered the potential reasons for price discrepancies in respect of certain goods between the two countries. In its February 2013 final report the Senate Committee stated, “Each product was found to have many factors influencing its pricing, and, although some products share some factors, … the Committee cannot offer an explanation as definitive as it would have liked for the price discrepancies for products between Canada and the United States.”
Consistent with the purpose of Canada’s competition law and the design of the Competition Act, the Competition Bureau’s testimony before the Senate Committee in 2011 was that “high prices in themselves do not mean that a particular market is uncompetitive.”1 The Bureau explained that “the Competition Bureau is not a price regulator and that Canadian businesses are free to set their own prices at whatever levels the market will bear, provided that the high prices are not the result of anti-competitive conduct such as price-fixing or abuse of dominant position.”2
However, the Commissioner’s position appeared to change following the government’s vow in the 2013 Throne Speech to end geographic price discrimination. Shortly thereafter, the Commissioner stated that he was “pleased to see the government move forward [with a plan to end price disparity]: promoting consumer welfare is well aligned with the direction other prominent competition agencies are taking.”3
The implications of the proposed new legislation remain to be seen because, as always, the devil is in the detail. The government may empower the Commissioner to identify and penalize companies with market power that are engaging in exploitative country-pricing practices, or the government may empower the Commissioner to determine and seek remedies in circumstances in which a firm with market power is engaged in excessive pricing or exploitative conduct, more generally. Either approach is controversial and risks undermining the paramount objective of competition law – to protect the competitive process and to attain greater economic efficiency.4
In light of the 2014 Budget’s specific reference to the government’s intention to “empower the Commissioner of Competition to enforce the new framework,” we expect that the Commissioner would, consistent with past practice, initiate a consultation processes for stakeholder input into the new framework and the Commissioner’s planned approach to enforcement.
1 The Canada-USA Price Gap, Report of the Standing Senate Committee on National Finance, p. 56 (February 2013).
3 Remarks by John Pecman, Commissioner of Competition, Toronto, Ontario (November 14, 2013).
4 This is typically equated with the maximization of consumer surplus or, in some countries, total surplus.