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Mind the gap

Why federal plans to introduce price-gap legislation will be costly for the Competition Bureau, private business and ultimately consumers.

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There is growing concern among competition law practitioners that Ottawa’s promise to narrow the gap between high consumer prices in Canada and those in the United States goes too far. The proposal for new “price gap” rules, critics fear, would change the role of the Competition Bureau, whose mandate it is to promote open and fair competition, into that of price regulator. What’s more, the federal government’s plan would unnecessarily strain the Bureau’s resources, experts agreed at the 2014 Annual Competition Law Fall Conference in Ottawa last month.

“It’s fundamentally inconsistent with everything we believe in,” said Michael Osborne, a partner at Affleck Greene McMurty in Toronto. “The Bureau is not a price regulator —never has been. It doesn’t have that skill set and it shouldn’t have that skill set.”

The proposal to regulate price differences was one of the highlights of last February’s federal budget, designed in part to offer relief to Canadian consumers fed up with having to pay more for goods and services than their southern counterparts. And though critics might hope the government will quietly drop its plans, recent reports indicate that the Conservatives plan to introduce new legislation this fall.

In May the C.D. Howe Institute roundly criticized the federal proposal, calling it “wrong-headed” and “impractical to implement.” And in a letter addressed to the Minster of Industry James Moore in March, the CBA even questioned whether there was “much evidence of widespread unjustified geographic price discrimination occurring in the Canadian marketplace.”

So is the price gap really an affliction worth healing? “We have to try to unpack what kind of price gap problems we actually think are worth worrying about,” said Dr. Neil Campbell, co-chair of the Competition and International Trade Law Groups at McMillan. “It is, I think, pretty well accepted that price discrimination is not necessarily bad and is not necessarily a problematic exercise of market power.”

Part of the issue is that given the complexity of pricing strategies across different industries, experts in competition law worry about the financial burden new measures would impose on both the Competition Bureau and private companies.

The Bureau would be called upon to determine what unjustified price differences are – a task that would take precious resources away from its other investigations. Oddly, it would also find itself struggling to square two seemingly incompatible views within its organization about the markets. “The Bureau is really good at doing competition law analysis,” said John Lawford, executive director and general counsel of the Public Interest Advocacy Centre. “And you have a group of people that believe very strongly in free markets and [they are] there to police the competition rules of the road so that the market can establish the price. And all of a sudden on the other case that the guy’s working on, he’s deciding what the price should be.”

Under its new mandate, the Bureau would have to analyze everything from currency rate fluctuations to the myriad of variables that go into calculating distribution costs. “In almost all industries, there isn’t one price,” said Campbell. “And you’ve got geographic dimensions; you have dimensions within particular differentiated products. You’ll have ranges over time periods and so there’s a whole associated set of issues around what is your benchmark in order to make some proper measurement of a gap in order to take some action, whatever that action might be.”

Of course, the new rules would also carry huge compliance costs for private distributors and retailers too, said Osborne. “They’re going to have to get expert reports before they introduce a product into the Canadian marketplace,” he said. “You know what [they might say]? ‘Maybe I’m not going to bring the latest product into Canada. Maybe I’m going to wait until it’s replaced by a new model in the U.S. Because if it’s a different product sold here versus the U.S. then all of a sudden this problem goes away.’”

Ironically, said Osborne, the cost of getting legal, economic and accounting advice for pricing decisions will simply end up justifying higher consumer prices in Canada.

Also troublesome is that cutting the retail price gap is considered by many to fall outside the scope of competition law. In testimony before the Senate Committee examining the Canada-U.S. price gap in 2012, even representatives from the Competition Bureau stated: “We do not determine what is or is not a fair price for any product or service. […] High prices in and of themselves do not fall under the purview of the [Competition] Act unless they are the result of anti-competitive conduct.”

At the CBA conference last month, Campbell further expressed concern that the federal proposal would interfere clumsily with trade policy.  Canada already has anti-dumping laws in place, he explained, which prevent foreign suppliers from selling into the Canadian market at prices lower than in their domestic markets. “We would be in the peculiar position of saying, ‘but also, please don’t sell into the Canadian market at a higher price than your home market’”.

Finally (and perhaps mercifully for critics), the law might be doomed from a constitutional point of view.  Any federal law attempting to regulate consumer prices is likely to face a challenge since the measures arguably fall under provincial powers over property and civil rights.

To support this view, Osborne invokes the 1922 Board of Commerce case, decided by the Privy Council, in which efforts by the federal government to come up with a broad ranging competition regime were declared ultra vires. “Now, I’ll grant you that a lot of constitutional water has flowed under the bridge since 1922,” Osborne told conference attendees. “But look at the Securities Reference which we just had, which reaffirms provincial powers over the economy, and in that case the Supreme Court talks about competition law being in pith and substances federal.”

Constitutional obstacles aside, there’s nothing to prevent Canada’s competition authorities from hiring new costing experts, and setting up public hearings pitting public interest advocates against private retailers, provided they are properly funded.

But it’s competition lawyers – not consumers – who are most likely to benefit in the long run.