© 2006 McGraw-Hill Ryerson Limited. All rights reserved.1 Chapter 15: Competition Policy Prepared by: Kevin Richter, Douglas College Charlene Richter,

© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

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Chapter 15: Competition Policy

Prepared by:Kevin Richter, Douglas CollegeCharlene Richter,British Columbia Institute of Technology


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Chapter Objectives

1. Describe the objectives of Canadian competition policy.

2. Explain the difference between the structure and performance methods of judging competition.

3. Give a brief history of Canadian competition policy.


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Chapter Objectives

4. Describe how the main anticompetitive offences are dealt with in the Competition Act.

5. Differentiate among horizontal, vertical, and conglomerate mergers.

6. Explain the economics behind the failed bank mergers.


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Chapter Objectives

7. Compare Canadian competition policy with competition policy of the United States and other countries.

8. List three alternatives to competition policy that government can use.

9. Describe the impact of globalization on competitiveness issues.


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Competition Policy and Economic Goals Canadian competition policy concentrates on

issues of economic efficiency, such as price stability and economic growth.

Secondary benefits of competition policy are full employment and a viable balance of international payments.


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Judgment by Performance or Structure? Judgment by performance – we should

judge the competitiveness of markets by the performance (behaviour) of firms in the market.


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Judgment by Performance or Structure?

Judgment by structure – we should judge the competitiveness of markets by the structure of the industry.


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Competition Policy in Canada

Canadian competition regulation began in 1889.

In 1910 the Anticombines Act was introduced.

In 1923 the Combines Investigation Act was created, to be replaced by the Competition Act in 1986.


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Criminal Provisions

Some offences contained in the Act under the criminal provisions:

Misleading advertising and deceptive marketing.

Price maintenance.

Predatory pricing.

Conspiracy.


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Conspiracy

Conspiracy is the most serious offence of the Competition Act.

It requires proof that the accused parties intended to enter into an agreement and that they knew it would have the effect of lessening competition unduly.


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Conspiracy

Conscious parallelism is not an offence under the Competition Act.

Conscious parallelism: when oligopolistic firms set similar prices and behave similarly with respect to other business practices without an explicit agreement.


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Predatory Pricing

It is an offence to sell at unreasonably low prices, which will eliminate competition.

“Unreasonably low prices” are prices below the firm’s average variable cost.

Predatory pricing is rare in Canada because the predatory firm must have significant market power to recover its losses.


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Per se Offences

Per se offence: a violation of the Competition Act in which proof of undue lessening or prevention of competition is not required; the injury to competition is presumed.

This section addresses interest rates, loan conditions, and customer service issues for financial institutions.


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Civil Provisions

Some offences contained under the civil provisions are:

Refusal to deal Exclusive dealing, tied selling and market

restriction Abuse of dominant position Mergers


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Exclusive Dealing, Tied Selling, and Market Restriction Exclusive dealing – when a supplier requires

the buyer to deal with only the seller’s product.

Tied Selling – when the supplier requires the buyer to purchase another of seller’s products as a condition to obtain the desired product.


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Abuse of Dominant Position

An offense occurs if the dominant firm prevents competition.

Aggressive, pro-competitive behaviour arising from a firm’s superior ability is not an offense.


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Specialization Agreements

Specialization agreements are agreements by companies to divide up production between them, so that each can become more efficient in producing only a segment of the production.


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Mergers

Having a dominant position as a result of merger activity is not an offence.

Abusing the dominant position is an offence.


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Notifiable Transactions

Large companies must advise the Competition Bureau ahead of time of their intention to merge.

The prenotification requirement allows the Bureau to assess the effects of the merger before irreversible commitments are made.


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Merger is a general term meaning the act of combining two firms into one.

The result is often an increase in market concentration.

Mergers and Acquisitions


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An acquisition is a merger in which a company buys another company and the purchaser has the right of direct control over the resulting operation.

It is a merger, but not a merger of equals.



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Takeovers and acquisitions can be friendly or hostile.

A friendly takeover is one in which one corporation is willing to be acquired by the other.

A hostile takeover is a merger in which the firm being taken over does not want to be taken over.



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Horizontal Mergers

A horizontal merger is the merging of two companies in the same industry.

Most Canadian competition policy concerns horizontal mergers.

Mergers of companies with substantial market shares in the same industry are most likely to be prohibited.


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Vertical Mergers

A vertical merger is a combination of two companies that are involved in different phases of producing a product (one a buyer, and another a supplier).

A conglomerate merger is the merging of two companies in relatively unrelated industries.


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Mergers

Globalization leads to mergers because firms can gain instant foreign distribution networks, knowledge of local markets, and lower the costs by redirecting production to low-cost areas.


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Mergers

Deregulation has encouraged mergers that take advantage of economies of scale and scope – bank mergers and media company mergers are examples.


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Economics of Bank Mergers

On January 23, 1998, the Royal Bank of Canada (now RBC Financial) and the Bank of Montreal notified the Competition Bureau of their intention to merge.

Shortly after, the Canadian Imperial Bank of Commerce and the Toronto Dominion Bank announced their intention to merge.


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The issue before the Commissioner was whether the mergers would lessen or prevent competition, by raising prices, reducing choices, or reducing service.



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The banking industry is characterized by

Economies of scale Economies of scope Strong brand name High switching costs Strong customer loyalty



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The banks argued that the mergers should proceed on efficiency grounds.

The efficiency argument says that the merger would create cost savings from eliminating duplication, scale and scope economies, technology, and from adopting each others’ best practices.



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The Competition Bureau denied the mergers because the mergers were likely to

Substantially lessen competition Cause higher prices Reduce levels of service Reduce choice for consumers



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U.S. Antitrust Laws

U.S. ideology towards business and competition differs from Canada’s.

There is a strong bias toward laissez-faire and government noninvolvement in business.

There is simultaneously fear of bigness and monopoly.


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U.S. Antitrust policy

U.S. laws are designed to address the same types of anticompetitive behaviour that the Canadian competition laws do.

Both Canada and the U.S. give the government power to regulate markets against “unfair or deceptive acts or practices,” as well as against unfair competition.


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Price Regulation

Price regulation is regulation directed at industries that have elements of a natural monopoly.


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Social Regulation

Social regulation applies to most firms, and is not designed specifically for a natural monopoly.

Social regulation affects large aspects of all businesses: working conditions quality of the products production process firms are allowed to use.


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Government Ownership

Government ownership, where the government owns the firm, is an alternative way of dealing with natural monopolies.

European governments have used this approach more often than the Canadian government.


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Industrial Policies

An industrial policy is a formal policy that government takes toward business.

In actual fact, a country’s industrial policy is embodied in its tax code, its laws, and its regulatory structure.


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Globalization and free trade significantly affect a small open economy, such as Canada.

As Canada becomes more integrated into the global economy, big business faces more international competition so domestic market structure will become less important.

Changing Views of Competition


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Competitive Effects of Globalization The need for strong Canadian competition

policy is, therefore, diminished.

Structural factors such as market share and industry concentration, are becoming less relevant for competition policy, while foreign competition and efficiency issues gain more importance.


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Competition Policy

End of Chapter 15


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Appendix: Case Study:The Economics of the Microsoft Case

Chapter 15


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First Came IBM

In 1967, the U.S. Department of Justice sued IBM for violation of antitrust laws charging that the company was unfairly bundling hardware, software, and maintenance services on a take-it-or-leave-it basis.


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IBM

About the time when the court case was at its height, IBM was negotiating with a young upstart company about an operating system for the PC market which was just developing.

The system was DOS, and the company Microsoft. IBM refused to buy the operating system, and the cost of that decision was clear by the 1990s.


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Microsoft

Microsoft is the dominant player in the software industry, controlling over 50 percent of the world market for software and between 80 and 90 percent of the operating systems market worldwide.

Since all software must be compatible with an operating system, Microsoft has an enormous competitive advantage for its other divisions.


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Microsoft The U.S. Justice department charged

Microsoft with an antitrust violation:

Possessing monopoly power in the market for personal computing operating systems.

Tying other Microsoft products to its Windows operating system.

Entering into agreements that prohibit computer manufacturers from offering competing software.


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Is Microsoft a Monopolist?

Network externalities exist because as the number of applications supported by a single platform increase, the value of the platform also increases.


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Is Microsoft a Monopolist?

Economies of scale exist because of the cost of developing a new platform and new software is significant while, once developed, the cost of producing it is minimal.


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Is Microsoft a Predatory Monopolist? By directing the development of in-house

software to favour Windows, Microsoft strengthened the barrier to entry created by network externalities.


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Is Microsoft a Predatory Monopolist? Microsoft also penalized computer

manufacturers if they installed competing software.

Microsoft packaged Internet Explorer as part of Windows 95 at no additional cost to the buyer which froze out Netscape Navigator.


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In October, 2001, Microsoft and the Justice Department reached a settlement.

Microsoft must hide its programs to allow other programs to be used. Internet Explorer Windows Media Player

Resolution of the Microsoft Case


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End of Chapter 15

Appendix: Case Study:The Economics of the Microsoft Case

Documents

© 2006 McGraw-Hill Ryerson Limited. All rights reserved.1 Chapter 15: Competition Policy Prepared by: Kevin Richter, Douglas College Charlene Richter,