I www.fraserinstitute.org Contributors include: Reuven Brenner L Philipp e de Grandpre Steven Globerman J. William Rowle y Donald N . Thompson Edwin G . West Edited by Walter Bloc k www.fraserinstitute.org IV Canadian Cataloguin g i n Publicatio n Dat a Main entry under title: Reaction: the new Combines Investigation Act Bibliography: p. ISBN 0-88975-083-1 1. Canada. Combines Investigation Act - Addresses, essays, lectures. 2. Antitrust law - Canada - Addresses, essays, lectures. 3. Restraint of trade - Canada - Addresses, essays, lectures. 4. Competition, Unfair - Canada - Addresses, essays, lectures. I. Brenner, Reuven. II. Block, Walter, 1941 - III. Fraser Institute (Vancouver, B.C.) KE1639.5.R42 1986 343.71'072 C86-091206-X COPYRIGHT © 1986 by The Fraser Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. Printed in Canada www.fraserinstitute.org CONTENTS Introduction xiii Walter Block, Senior Economist, The Fraser Institute Chapter One Overview of Competition Law Changes, 1986-Style 3 William A. Macdonald I. GOVERNMENT INTERVENTION 3 Powerful economic developments 4 Improved process 4 Government-business alienation 5 Business community role 6 Canadian versus U.S. developments 6 New U.S. initiatives 7 Overview coverage 8 II. CONSTITUTIONAL ISSUES 8 Tribunal versus courts 9 Proposed competition tribunal 9 Regrettable, but not fatal 10 Courts better choice 11 Cabinet override 11 Membership calibre, Cabinet responsibility, are fundamental 12 Powers reform 13 III. THREE KEY PRINCIPLES 13 Vast improvement 14 Shortcomings remain 14 Conspiracies essentially unchanged 15 New civil abuse of dominant positions acceptable 15 Merger provisions key 16 Consumer in driver's seat 16 Wrong policy choice made 17 U.S. has got message 18 IV. SUMMATION 18 www.fraserinstitute.org VI Chapter Two Merger and Pre-Merger Notification 21 J. William Rowley I. THE LAW TODAY 22 Vigorous markets 22 Present constraints/reasons for change 24 II. THE MERGER PROPOSALS 25 A new definition — joint ventures exempted 25 The substantive test 26 Structuralism 27 Factors to be considered 28 An efficiency defence 29 III. POWERS OF THE TRIBUNAL 29 Interim orders — two regimes 30 Merger pre-notification 31 Pre-notification provisions 32 Exemptions 33 IV. CONCLUSIONS 34 Chapter Three The Monopoly Provision: Abuse of Dominant Position 43 C.J. Michael Flavell I. INTRODUCTION 43 The present law 43 A double test 45 Motivation 46 Allied Chemical 46 Irving 47 The finding 48 www.fraserinstitute.org Vll II. THE NEW PROPOSALS: BILL C-91 49 The concept of "control" 50 A "practice" 51 Malevolent intent 51 Predation 53 Exceptions 54 Intellectual property 55 Conscious parallelism 56 III. CONCLUSION 56 Notes 57 Chapter Fou r Legal Power s L. Philippe de Grandpre 61 I. INTRODUCTION 61 The Criminal Law power 62 Peace, Order and Good Government (POGG) 63 The regulation of Trade and Commerce 63 II. CONSTITUTIONAL BASE 64 The Bill and the Charter 65 True nature of Tribunal 67 Tribunal or Court 68 III. CONCLUSIONS 69 Chapter Five The Sugar Case as a Reason for "Strengthening" the Combines Act: An Economic Perspective 71 Donald E. Armstrong I. INTRODUCTION 71 Not guilty, guilty, not guilty 72 The defense 73 An attempt to increase market share 73 www.fraserinstitute.org Vlll II. THE FATEFUL TERM: "TACIT AGREEMENT" 74 Market characteristics 74 Competitive options facing the sugar companies 76 Competition in between collusion and predation 76 The law and "tacit agreement" 77 The trial judge on prices 78 Economic sense 78 Follow the leader 79 III. MARKET SHARES 80 Price cutting 80 The facts on market shares 81 Appropriate expectations on market shares 82 Market-share bench marks 86 Market shares after entry of new firm 86 IV. EVIDENCE OF NON-COLLUSION 87 Price competition IS competition for market share 87 What's in a name? 89 V. "TACIT AGREEMENT" EQUALS CONSCIOUS PARALLELISM 89 "Tacit agreement" and competition 90 Innocence 91 Risk and uncertainty 91 Notes 92 Chapter Six The "Errors" in Atlantic Sugar et al.V.R. 95 Colin Irving I. INTRODUCTION 95 Perceived error 96 Criminality 96 II. INTENT 97 Double-onus 98 Non-existent 99 Notes 100 www.fraserinstitute.org IX Chapter Seven The Merger Provisions of Bill C-91: An Evaluation 103 Steven Globerman I. INTRODUCTION 103 Background to the merger amendments 104 Similarity 105 Alternative approaches to merger policy 105 II. THE BENEFITS AND COSTS OF MERGERS 106 Monopsony power 107 Ease of exit 108 Perversity 108 Concentration 109 The potential costs of a merger review process 110 III. F.I.R.A. 110 Political influence 111 IV. CONCLUSIONS 112 Notes 112 Chapter Eight Innovations and the Competition Act 117 Gabrielle A. Brenner and Reuven Brenner I. "COMPETITION" - WHAT DOES IT MEAN? 117 Non-sequitur 118 Definition 119 II. COMPETITION AND THE SIZE OF ENTERPRISES 119 An objection 121 III. MONOPOLISTIC AND COMPETITIVE BEHAVIOUR, AND THE NOTION OF INTENT 121 Monopoly power? 122 Innovation 122 Dominant firms 124 Oligopolies 125 www.fraserinstitute.org IV. ON INFERRING NON-COMPETITIVE BEHAVIOUR 126 Observed prices 127 The Bertrand Report 127 Other non-pricing strategies and "conscious parallelism" 128 Collusion and innovation 129 V. ABUSE OF DOMINANT POSITION AND COLLUSION 130 The "squeeze" 131 Self-service 132 Fighting brands 132 Incompatibility 134 Delivered pricing 135 Insurance function 136 VI. CONCLUSION 137 Notes 138 Chapter Nin e Regulation an d th e Consume r Interes t 141 James C. W. Ahiakpor I. COMPETITION 142 Rivalry 142 Economic liberty 144 II. CONSUMERS' INTERESTS AND COMPETITION LAW 145 Limits of knowledge 146 Consultation 147 Dichotomy 148 Inflation 148 III. SUMMARY AND IMPLICATIONS 149 Imports 150 Notes 151 www.fraserinstitute.org XI Chapter Ten The "Abuse of Dominant Position" Provision 157 Donald N. Thompson I. A NEW ENVIRONMENT 158 II. THE "ABUSE OF DOMINANCE" PROVISIONS 158 III. RELATED PROVISIONS OF BILL C-91 160 Stemming uncertainty 161 Remedies 162 Negotiations 163 Application to joint monopoly situations 163 Basing points 164 Information exchange 165 Price leadership 166 Price protection 166 IV. CONCLUSION 167 Notes 167 Chapter Eleve n Industry Structur e an d Competitio n Polic y 171 Donald J. Lecraw I. INTRODUCTION AND APOLOGIA 171 II. INDUSTRIAL ORGANIZATION: THEORY AND EVIDENCE 172 Government policy 173 Efficiency 174 Recent evidence 175 Industrial concentration 176 Complexity 177 Empirical studies in Canada 178 Foreign trade 180 www.fraserinstitute.org Xll III. STRUCTURAL ASPECTS OF PAST COMPETITION BILLS 181 The threshold 183 IV. INDUSTRY STRUCTURE AND BILL C-91 184 Notes 185 Chapter Twelve Canada's Competition Act in the Light of U.S. Experience: A Cautionary Tale 187 Edwin G. West I. INTRODUCTION 187 I. INTELLECTUAL STATUS OF ANTITRUST 188 Counter-productivity 189 III. MONOPOLY AND WELFARE 189 Price discrimination 190 An alternative view 192 Rivalrous competition 192 IV. POLITICS 193 A paradox 194 V. THE ANTITRUST INDUSTRY 195 VI. COSTS AND BENEFITS 196 Traditional hostility 196 VII. COMPETITION AND FAIRNESS 197 Conclusion 198 Notes 199 Bibliography 203 www.fraserinstitute.org Introduction On December 17, 1985, Federal Consumer and Corporate Affairs Minister Michel Cote tabled in the House of Commons a bill to amend Canada's present competition law. Although Mr. Cote claimed that the new legislation will "protect the marketplace" and "give consumers the widest selection of goods at the lowest possible price," this is extremely unlikely. A Combines Investiga- tion Act which interferes with our system of competitive enterprise will instead stifle business rivalry, and lead to economic inefficiency. This, in turn, will reduce the welfare of the Canadian consumer. The main drawback in Mr. Cote's initiative is that it is predicated on an untenable and outmoded economic theory. This is the view that business concentration and rivalrous competition are incompatible. It, in turn, stems from the textbook model of "perfect competition," which declares ideal a scenario in which firms are small and numerous, goods are homogeneous and unchanging, information is costless and profits are always zero. But in the real world which Canada for better or worse inhabits, these conditions are irrelevant to rivalrous business struggle. In the marketplace, large scale enterprises, even gigantic ones, are not exempt from competi- tion. They, too, can fail if they cease to satisfy consumer demands for quali- ty, low price, efficiency, new products, good service and reliability. Some improvemen t Thus, it is erroneous to equate industrial concentration — whether achiev- ed through merger, corporate take-over, or attracting customers from com- petitors — with failure to compete. To the credit of the new amendments, high concentration, large size, great market share and dominant position are no longer per se illegal. There is still a presumption, however, that these criteria are indications of, or evidence for, non-competitiveness. But there is no necessary relationship between scale of operation, no matter how large, and lack of competitive behaviour. On the contrary, competition and concentration of achievement go hand in hand in most human endeavours. This is the rule, not the exception. Given www.fraserinstitute.org xiv Introduction that talents and abilities are unequally spread around among the popula- tion, and given that full and rigorous competition takes place, it should oc- casion no surprise that there should sometimes be only a few "winners," "survivors," or eminent persons associated with each activity. This is true in all areas of human endeavour, sports, politics, the arts — and business as well. In sports, those who think that competition can occur only if numerous competitors take part, fail to appreciate what takes place in a boxing ring. In politics, those who think this believe that the continued success of one party implies monopoly, or non-competitiveness. They cannot understand the difference between the situation in Alberta and Albania — both of which have had a single government for several decades, "supported," as the case may be, by overwhelming majorities.