Higher Prices, Less Choices; Let’s Reject Cartels

Commentary, Economy, Frontier Centre

Imagine you and your business partners tried to corner the Canadian market for light bulbs. You conspired to control production and divvy up the market to inflate prices. Cartels like this are illegal in Canada. And there are tough criminal penalties if you’re caught – fines of up to $25-million and 14 years in jail under the Competition Act.

But under a murky legal defence known as the “regulated conduct doctrine,” cartels are openly tolerated in many federally and provincially regulated industries.

Think dairy farming, liquor retailing or telecom. In these industries, blatantly anti-competitive behaviour is legal as long as it’s sanctioned by federal and provincial authorities.

That doesn’t make it right or more palatable for consumers, who pay dearly in the form of higher prices and fewer choices. Like sheep, Canadians assume the status quo is unassailable. With barely a whimper, we accept inflated prices for things such as cheese, liquor and TV offerings.

We shouldn’t.

The C.D. Howe Institute’s competition policy council – made up of prominent competition lawyers, academics and retired regulators – wants the federal Competition Bureau to take a much more muscular stand. In a recent report, the council urged the bureau to get “directly engaged” in policies, decisions and mergers that limit competition in regulated industries.

“We should all open our eyes from time to time. If anybody, other than the dairy farmers, did what they did, they would get arrested,” complained Finn Poschmann, the council’s chair and vice-president of research at C.D. Howe.

Don’t expect the Competition Bureau to start slapping charges on dairy farmers and their provincial marketing boards.

But Mr. Poschmann argued the agency would be well within its mandate to highlight where consumers are being harmed and then press governments to justify the cost to society of what are essentially state-sanctioned cartels.

“It would be nice if our competition authorities felt emboldened to challenge, or at least to expose, that kind of behaviour and its costs,” Mr. Poschmann explained. “People assume anti-competitive behaviour is here to stay. It doesn’t have to be.”

The regulated conduct doctrine has been around since 1929, when it was invoked in court in a case of illegally marketed potatoes. And for more than 80 years legal experts have battled over the doctrine’s true meaning.

In a bid to clear up the long-standing legal grey area, Ottawa enshrined the doctrine in the Competition Act in 2010. It was later clarified in a Competition Bureau bulletin.

The result is that companies in regulated industries can invoke the doctrine to shield behaviour that otherwise would be illegal. In some cases, what is illegal under federal law becomes legal under provincial law – an unusual reversal of the normal hierarchy of laws.

But the federal guidance hasn’t ended the controversy. And there’s no clear sense of what limits there are on anti-competitive behaviour, such as restricting supply, setting prices or limiting new entrants in an industry.

The C.D. Howe’s competition policy council “unanimously agreed” that the doctrine’s application is “needlessly unclear.” The council’s report, “Closing the Back Door Route to Cartels: The Need to Clarify the Regulated Conduct Doctrine,” also pointed out that recent court rulings have so far been inconclusive and the competition bureau’s guidance remains “vague.”

A recent Ontario Superior Court ruling in a dispute between Mercedes-Benz Canada Inc. and auto importer Fournier Leasing Co. Ltd. confirmed that companies can invoke the doctrine. But the judge in the ongoing case said it’s not a blanket defence.

The case centres on allegations that Mercedes-Benz conspired to keep out cheaper U.S. car imports. The company countered that its conduct – namely, getting Ottawa to block imports of all Mercedes and BMW vehicles – is authorized by a federal certification and inspection regime.

The import rules are designed to keep unsafe vehicles off Canadian roads. That makes sense. The intent is not to deprive Canadians of cheaper cars.

Look across the country. There are endless similar examples of heavy-handed regulations imposed in the name of lofty policy ends, such as protecting Canadian culture, promoting home-grown energy or boosting farm incomes.

Canadians need to constantly ask themselves: Are these regulations the best way to achieve policy goals? Are they worth the price? And are they still relevant?

The answer may be no.