Copyright 2002, Pearson Education Canada1 Competition Policy and Regulation in Canada Chapter 15

Copyright 2002, Pearson Education Canada2 Historical Background to Regulation in Canada z1888: Railway Committee of the Privy Council was established to set railway fares and freight rates. z1889: An Act for the Prevention and Suppression of Combinations in the Restraint of Trade zEarly twentieth century: Crown corporations are created to deal with natural monopolies zWWII: Crown corporations developed rapidly to produce munitions and supplies under C.D. Howe. z1986: Competition Act and Competition Tribunal Act which still govern Canadian competition policy.

Copyright 2002, Pearson Education Canada3 Goals of Competition Policy zEconomic goals yThe economic goal of competition policy is to ensure an efficient and equitable allocation of scarce resources. zPolitical goals yThe political goal of competition policy is to discourage the concentration of economic and political power in the hands of a few.

Copyright 2002, Pearson Education Canada4 Anticompetitive Practices zMergers ythe combining of two or more companies into a single company zCartels ya group of firms that acts together as if it were a monopoly zPredatory pricing ya strategy whereby a firm sells at a price below cost to drive competitors out of business, goal is to absorb losses in the short run to reduce competition

Copyright 2002, Pearson Education Canada5 Anticompetitive Practices (cont.) zPrice discrimination ya pricing policy that involves charging different customers different prices even though the cost of production is the same zResale price maintenance ya policy of forcing retailers to sell a product at a price level fixed by the manufacturer zExclusive dealing ya policy of supplying a product only if the purchaser agrees not to buy similar products from competitors

Copyright 2002, Pearson Education Canada6 Anticompetitive Practices (cont.) zTied selling ya policy of supplying a product only if the purchaser agrees to buy other products from the supplier zRefusal to supply ya policy of not selling a product to another firm as part of a strategy to increase market share by eliminating that firm as a competitor zAbuse of dominant position yany policy pursued by the dominant firm in an industry to limit competition

Copyright 2002, Pearson Education Canada7 Anticompetitive Practices (cont.) zMisleading advertising and deceptive marketing practices yoccur when firms attempt to capture customers by providing inaccurate information about product availability, quality and price.

Copyright 2002, Pearson Education Canada8 Debate over Canadian Competition Policy zInternational competition has made competition policy unnecessary or has allowed huge multinationals to dominate world markets. zEfficient capital flows and relatively contestable markets have reduced barriers to entry in most markets. zDistrust of government and its inefficiency. zDistrust of private power which can undermine democracy.

Copyright 2002, Pearson Education Canada9 Regulation zGovernment plays two contradictory roles yit promotes competition and restricts market power yit restricts competition by simultaneously regulating and protecting certain industries zRegulation is the government’s way of protecting and controlling monopoly power.

Copyright 2002, Pearson Education Canada10 Regulating a Natural Monopoly (Figure 15.1) zWithout regulation the firm would produce at Q* and P*. zSetting price at P A means that average cost is covered and investors earn a normal rate of return but the societal losses of monopoly are avoided.

Copyright 2002, Pearson Education Canada11 Problems of Regulation zGathering and analyzing the necessary data is expensive, and subject to error and differences of opinion. zLack of incentives to be efficient can lead to the Averch-Johnson effect (the tendency for regulated monopolies to build more capital then they need) if rates of return are based on assets. zExcessive non-price competition can occur, such as extreme product differentiation.

Copyright 2002, Pearson Education Canada12 Review Terms and Concepts zabuse of dominant position zAverch-Johnson effect zcartel zCrown corporation zexclusive dealing zmerger zmisleading advertising and deceptive practices zpredatory pricing zprice discrimination zprivatization zrefusal to supply zresale price maintenance ztied selling