Price-cost Test Research Articles

Canada's Draft Abuse of Dominance Guidelines: A Comparative Look

The last year has been ripe with antitrust authorities issuing (and withdrawing) guidance on their approach to evaluating practices of abuse of dominance. Canada's Competition Bureau is no exception with its January 2009 release of revised guidelines on the abuse of dominance provisions (sections 78 and 79 of the Competition Act) for public consultation. These guidelines differ in some important respects not only with the Bureau's 2001 version of these guidelines, but also with the European Commission's December 2008 guidance on abusive exclusionary conduct by dominant undertakings, and the US Department of Justice's 2008 paper on single-firm conduct under section 2 of the Sherman Act (withdrawn May 2009). This paper identifies the differences in enforcement approaches adopted or suggested by these various antitrust agencies and, where differences are sharp, explores the possible causes of these differences. Canada is revealed to be somewhat of an outlier in regard to certain issues, including: not adopting the use of a price-cost test for non-predatory price conduct, taking a firm position on an approach to market definition in abuse cases, and, at least relative to the US and Canada’s stated 2001 position on the issue, adopting a distinctive approach to joint dominance.

Separating Pro-Competitive from Anti-Competitive Loyalty Rebates: A Conceptual Framework

Separating Pro-Competitive from Anti-Competitive Loyalty Rebates: A Conceptual Framework

The Antitrust Assessment of Loyalty Discounts and Rebates

Loyalty discounts lie at the heart of the debate on single firm conduct, probably the most controversial issue in contemporary antitrust practice. Under particular conditions, loyalty discounts may have an exclusionary effect. However, they constitute a classical form of price competition, an effective commercial tool and a way to solve coordination problems in the production chain. In the United States, the fear to lessen price competition has led to a very strong presumption of legality of discounts, provided that they are not predatory or bundled. In the EU, the tendency to induce loyalty, if not a mere intent to exclude rivals, is traditionally deemed to be enough to justify the prohibition of the practice. In the paper, it is submitted that the opposite (almost) per se rules prevailing on the two sides of the Atlantic should be set aside. A detailed analysis, based on a suitable price-cost test and a careful assessment of the impact of the practice on the competitive capacity of minor rivals and on the overall degree of competition in the market concerned, would allow to intervene in cases of seriously exclusionary discount policies, while limiting the unnecessary prohibition of effective forms of price competition.

Predatory Foreclosure

Dominant firms can use various strategies to eliminate or deter competition, including unlawful price cuts or “predatory pricing”. That strategy involves a willingness to absorb losses in the near term that are rational only because they lead to greater profit in the longer term, after competitors have been disciplined or eliminated. Despite differences in statutes across jurisdictions, the roundtable discussion held in October 2004 in the Competition Committee quickly revealed a virtually unanimous view that the purpose of competition laws is to protect and promote competition, not competitors. With respect to methods for detecting predatory prices, including price-cost tests, there was a greater diversity of views because different cost measures are appropriate in different situations. There was broad agreement among Members that investigations should include an examination of whether an alleged predator would likely be able to recoup its predatory losses, with a negative finding indicative of a low probability of harm to competition.

THE ANTITRUST ASSESSMENT OF LOYALTY DISCOUNTS AND REBATES

Loyalty discounts lie at the heart of the debate on single-firm conduct, probably the most controversial issue in contemporary antitrust practice. Under particular conditions, loyalty discounts may have an exclusionary effect. However, they constitute a classical form of price competition, an effective commercial tool, and a way to solve coordination problems in the production chain. In the United States, the fear of lessening price competition has led to a very strong presumption of legality of discounts, provided that they are not predatory or bundled. In the EU, the tendency to induce loyalty, if not a mere intent to exclude rivals, is traditionally deemed to be enough to justify the prohibition of the practice. In the paper, it is submitted that the opposite (almost) per se rules prevailing on the two sides of the Atlantic should be set aside. A detailed analysis, based on a suitable price-cost test and a careful assessment of the impact of the practice on the competitive capacity of minor rivals and on the overall degree of competition in the market concerned, would allow intervention in cases of seriously exclusionary discount policies, while limiting the unnecessary prohibition of effective forms of price competition.

Anticompetitive Overbuying by Power Buyers

There is now a growing interest in antitrust in the anticompetitive conduct of buyers. This article (to be published in the Antitrust Law Journal) analyzes potentially anticompetitive conduct by power buyers. Overbuying involves increasing the purchases of a particular input with the purpose and effect of gaining either monopsony power in the input market or market power in the output market. Predatory overbuying is overbuying inputs as a predatory strategy to cause buyer-side competitors in the input market to exit from the market or permanently shrink their capacity, in order to gain monopsony power in the input market. Raising Rivals' Costs (RRC) Overbuying is overbuying inputs in order to raise rivals' input costs and thereby gain market power in the output market. After briefly reviewing classical monopsony conduct, the article analyzes these two strategies in detail. It examines the impact of the conduct on the overbuying firm, its competitors, input suppliers and the consumers in the output market. It sets out the conditions under which these strategies are both profitable for the firm and harmful to consumers. This analysis suggests a four-part rule of reason legal standard. It then discusses short-cut tests and compares this conduct to classical predatory pricing, including the relevance of the price-cost test and the profit-sacrifice test. It also compares the relative competitive risks of the two overbuying strategies. It concludes that predatory overbuying raises less serious competitive concerns than RRC overbuying, and that plaintiffs alleging such predatory overbuying should be subject to a more demanding legal standard, including a requirement that plaintiffs show price less than cost.