on the social welfare objectives of canada's antitrust statute

Canadian Public Policy

On the Social Welfare Objectives of Canada's Antitrust StatuteAuthor(s): Marc DuhamelSource: Canadian Public Policy / Analyse de Politiques, Vol. 29, No. 3 (Sep., 2003), pp. 301-318Published by: University of Toronto Press on behalf of Canadian Public PolicyStable URL: http://www.jstor.org/stable/3552288 .

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On the Social Welfare Objectives of

Canada's Antitrust Statute

MARC DUHAMEL UBC Center for Study in Government and Business Sauder School of Business University of British Columbia Vancouver, British Columbia

La Loi sur la concurrence est sans contredit l'une des lois les plus sophistiqu6es d'un point de vue 6conomique jamais mises en vigueur au Canada. Ainsi a-t-on soutenu que l'ultime objectif des dispositions de la Loi sur la concurrence en matiere de fusionnement serait de promouvoir l'efficacit6 6conomique de l'6conomie canadienne. Cet article 6labore une proposition logique bas6e sur les interpr6tations juridiques des dispositions de fusionnement de la Loi sur la concurrence selon laquelle l'objectif normatif sous-tendant la loi s'oppose a la redistribution de la richesse caus6e par un accroissement du pouvoir de march6 par rapport A l'allocation 6conomique 6tablie (c.-a-d. le statu quo). Cette analyse positive implique que l'objectif de bien-etre social sous-jacent a la loi antitrust canadienne ne concorde pas avec la perspective usuelle sur le r81e des institutions publiques en matiere de politique de la concurrence au Canada.

The Competition Act is arguably one of the most economically sophisticated legal statutes ever enacted in Canada. As such, it has been argued that the paramount objective of the merger provisions of the Competition Act should be the promotion of economic efficiency. This paper examines the underlying normative objective of Canadian merger law from a positive perspective by looking at the legal framework established in Canadian jurisprudence. An argument is developed that demonstrates the existence of distributional objections to wealth redistribution caused by an increase in market power with respect to the status quo allocation of economic resources. This social welfare objective is inconsistent with the commonly held view of the functions of competition policy institutions in Canada.

One reason for the stifling of received opinion about antitrust, why counterargument makes so little headway, is that most of us accept our first principles and even our intermediate premises uncritically, as given, because we assume that

they were established theoretically and confirmed empirically by legislators and judges long ago (Bork 1978, 15).

INTRODUCTION

What is the normative objective for mergers of antitrust legislators? How do public institu-

tions that administer competition policy determine whether society is better-off, worse-off, or indifferent with a merger than without it? These positive questions have interested legal and economic

CANADIAN PUBLIC POLICY - ANALYSE DE POLITIQUES, VOL. XXIX, NO. 3 2003



302 Marc Duhamel

scholars since the inception of antitrust laws in the late nineteenth century.

It has been widely argued that the paramount objective of Canadian merger policy should be to

promote the economic efficiency of the Canadian

economy and abstract from redistributive concerns, although such an objective was never explicitly stated by the legislators of the Canadian Competi- tion Act (R.S. 1985, c. C-34).' Implicit in this normative position is the idea that the economic

well-being of Canadian society is best advanced, in the context of a merger, by a focus on the net effects of a merger on the allocative, technical, and

dynamic efficiency of the Canadian economy.

A consensus among Canadian academics (economists and lawyers) formed the basis for the adoption of a "total welfare" approach to the enforcement of Canadian merger law by the institutions responsible for the enforcement of merger policy in Canada

(the Competition Tribunal and the Competition Bu-

reau), with the exception of obiter dictum remarks of Justice Reed in Director of Investigation and Research v. Hillsdown Holdings Ltd.2 Margaret Sanderson, acting assistant deputy director at the

Competition Bureau at the time, explains: "In economic terms this means that a merger will not be

challenged where it has, or is likely to have, the effect of increasing the sum of producer and consumer

surplus" (Sanderson 1997, 626). Prior to recent Ca- nadian court decisions in the Propane merger case, this normative perspective was widely shared in Canada. In this case, an important gap between what should be and what is the normative objective of Canadian merger policy emerged.

This paper furthers the positive examination of the legislator's intent for Canadian merger law un- dertaken by the Federal Court of Appeal and the

Competition Tribunal in the Propane case and examines the underlying normative objective by focusing on the legal determinants of an anti- competitive merger in Canadian jurisprudence. The

social welfare objective of the legislator is inferred from the antitrust rules that are applied by the Com-

petition Tribunal in merger cases.

Many consider the Propane merger case "the most significant [decision] rendered by the [Com- petition] Tribunal in the 14-year period since the Tribunal was created" (Wong 2000). This case, the first one to litigate the issue of efficiencies in a Ca- nadian merger, establishes that a total welfare enforcement standard can be inconsistent with the intent of the legislator when anti-competitive mergers generate technical efficiency gains.

The Propane case is a four-year contested legal battle about the merger of two national retailers of

propane in Canada consisting of two series of sub-

sequent decisions by the Competition Tribunal and the Federal Court of Appeal. The first decision by the Competition Tribunal (Commissioner of Com-

petition v. Superior Propane Inc. and ICG Propane Inc. 2000, Propane I hereafter) was successfully appealed by the Commissioner of Competition to the Federal Court of Appeal (Commissioner of Com-

petition v. Superior Propane Inc. and ICG Propane Inc. 2001, Propane Appeal I hereafter) on the basis that the Tribunal incorrectly interpreted the effi-

ciency defence provision (section 96) of the

Competition Act as directing a total surplus approach. The Competition Tribunal re-examined the evidence of the merger under an approach resem-

bling the balancing weights method proposed by Townley (1999) and found that the efficiency gains salvaged, again, the anti-competitive merger in its second decision (Commissioner of Competition v.

Superior Propane Inc. and ICG Propane Inc. 2002, Propane II hereafter). The Commissioner of Com-

petition appealed that decision on several grounds, including on the issue of allowing mergers-to- monopoly in 18 out of 75 relevant geographical markets across Canada (including the national account coordination services market). The most recent decision by the Federal Court of Appeal (Commissioner of Competition v. Superior Propane




On the Social Welfare Objectives of Canada's Antitrust Statute 303

Inc. and ICG Propane Inc. 2003, Propane Appeal II hereafter) issued on 31 January 2003 confirmed the Propane II decision and the "balancing weights" as an approach consistent with the legislator's intent.

Effectively ending the Propane case, the Com- missioner of Competition announced on 31 March 2003 that he would not appeal the latest decision of the Federal Court of Appeal because further litiga- tion would not sufficiently clarify the treatment of efficiencies in merger cases. On the same day, the Commissioner of Competition supported Bill C-249, An Act to Amend the Competition Act, before the House of Commons Standing Committee on Indus-

try, Science and Technology which seeks to amend the treatment of efficiencies in mergers (Commis- sioner of Competition 2003).3

There are two broad conceptual rationales supporting a total welfare objective for merger policy. First, there is the traditional economic argument that an increase in allocative efficiency increases the welfare of society.4 Second, there is the view that the institutions governing competition policy are

part of the allocative branch of government which should not be bothered by equity issues.5

From a practical perspective, much of the support for this normative objective can be traced back to contributions from Oliver Williamson and Robert Bork in American antitrust policy.6 Numerous antitrust observers have proposed normative arguments supporting the view that competition policy should be indifferent to wealth redistribution because com-

petition policy has no immediate concern with the

political or social concerns of the policymaker.7 However, few antitrust scholars have focused on a

positive analysis of the American legislator's intent.8

This paper shows that an order could be obtained from the Competition Tribunal under the Canadian Competition Act against a merger that results in substantial price increases but de minimis deadweight

loss.9 This implies the existence of distributional

objections to market power in the merger provisions of the Competition Act because it represents strict social preferences for the pre-merger status quo allocation of economic resources. Such distributional

objections are inconsistent with the application of the "Potential Pareto Improvement" criterion gen- erally used in cost-benefit analysis.10 More

importantly, the distributional issues that are uncovered here involve equity concerns about market

power that go beyond those that were raised in the

Propane case.

A reconsideration of the normative objectives of Canadian merger policy is important not only for the effectiveness of competition policy enforcement in Canada, but for other antitrust jurisdictions as well. Questions relating to efficiency and market

power are becoming increasingly important, as there is a growing interest by national competition policy authorities to adopt international enforcement best

practices." This paper provides an interesting and

unexpected parallel between the normative objectives of Canadian merger policy and the normative

goals of American antitrust laws described by Lande (1982). He argues that in passing the Sherman Act in 1890, the US Congress was concerned principally with preventing transfers of wealth from consumers to firms with market power.12

The distributional objective of merger policy uncovered in this paper favours the status quo allocation and distribution of economic resources. Such an objective is consistent with the one identified by Cragg (1991) who derives the implicit government preferences for income inequality in an empirical study of Canada's indirect tax system. Consistent with Cragg's results, this paper shows that there is no systematic progressive or regressive distributional objective for competition policy in Canada.

Interestingly, indirect taxes and antitrust policy are often seen as part of the allocation function of government. Also, because the paper is a positive analysis of the normative objective of Canadian




304 Marc Duhamel

merger policy, it is related to other studies that try to uncover the social welfare objectives of regulators, bureaucracies, and policymakers.13

The rest of this paper is organized as follows. The next section argues that the Canadian merger legal framework is different than the traditional normative economic framework according to several

judicial interpretations of what criteria determine an anti-competitive merger. The main argument is

developed in the third section and states that the normative welfare objective of Canadian merger law is inconsistent with the potential Pareto improvement criterion. A general discussion of the result follows in the next section and outlines the principle of "distributional justice" underlying the result. The final section concludes briefly.

NORMATIVE APPROACHES TO MARKET POWER

Numerous antitrust scholars and commentators have

supported the view that normative legal approaches to market power in merger policy should be consistent with the traditional normative economic

approach to market power.'1 A somewhat stronger view is expressed by Landes and Posner (1981, 976) who argue that economic and legal approaches to market power are congruent in antitrust policy. Ar-

guably, statements about the underlying normative

objective of merger policy rest on either (i) an ex-

plicit presumption or finding that normative legal and economic approaches to market power are

equivalent (a positive perspective), or (ii) an implicit prescription that both normative approaches should be congruent (a normative perspective).15

From a positive perspective, legal and economic normative approaches to market power are equivalent if an equivalence exists between the circumstances (e.g., the evidence) and the framework (e.g., antitrust rules) that would trigger an antitrust enforcement action (e.g., asset divestiture) against an anti-competitive merger. Therefore, it is

important to distinguish between the underlying normative antitrust question - whether "competition is lessened" by a merger - from the traditional normative economic question - whether allocative

efficiency is decreased by a merger. While both

questions are obviously related through the central issue of market power, they need not be evaluated under equivalent normative frameworks.16

In light of the support for the traditional normative approach to merger policy in Canada by legal and economic scholars, it is important to highlight some important differences that exist between legislative and economic normative approaches to market power in Canada.

The Traditional Economic Approach The traditional normative approach about market

power in economic textbooks is aggregate economic

surplus. For example, Carlton and Perloff explain that "if a monopoly restricts its output and raises its

price above marginal cost, society suffers a

deadweight loss" (1994, 143). For Mas-Colell, Whinston and Green "the [social] welfare loss from this quantity distortion, known as the deadweight loss of monopoly, can be measured using the change in Marshallian aggregate surplus" (1995, 385).

In the economics literature, the normative view that the wealth transfer between individuals does not have any negative effect on social welfare gets support from the potential Pareto improvement criterion. The potential Pareto improvement criterion is used to rank alternative states of resource allocation on the basis of their potential for Pareto

improvements through costless lump-sum redistribution. Mainly attributed to Kaldor (1939) and Hicks

(1939), the purpose of invoking the potential Pareto

improvement criterion is an attempt to separate the efficiency and equity aspects from changes in the allocation of economic resources."17 Whether the redistribution is actually carried out is an important but separate decision. Marshallian aggregate surplus standard is only one method of implementing the





potential Pareto improvement criterion. Aggregate willingness-to-pay (compensating variation) and

aggregate willingness-to-receive (equivalent varia-

tion) are other methods of implementing the criterion which take into account differences across individuals in marginal utilities of income.18

While some antitrust observers think that it is

fairly conventional for economists to conduct applied welfare analysis under the potential Pareto

improvement criterion, some economists have ex-

pressed serious reservations about the procedure.19 There are several problems associated with its use. First, because it relies on hypothetical compensation, any judgement about an increase in the economic well-being of society based on this principle is simply hypothetical.20 If all individuals who are harmed by an increase in market power are not

compensated for their loss of welfare, social welfare does not necessarily increase. Second, while economic theory provides empirical conditions under which social welfare evaluations with

hypothetical compensation result in an increase in social welfare, they are restrictive and not likely to be met in real situations.21 Third, most economists

acknowledge that costless lump-sum transfers are not practically feasible even when wealth redistribution is considered a separate problem. Since redistribution between individuals involves at least some administrative costs, the actual lump-sum transfer of the wealth transfer will imply some loss of economic efficiency which should be taken into account. If a merger satisfies the potential Pareto

improvement criterion and redistribution is under- taken by some other branch of government, there

may not be enough economic resources left to effect a Pareto improvement which would increase social welfare.

Therefore, unless it can be demonstrated that legislators intended competition policy to be applied in such a way as to concentrate solely on the aggregate deadweight loss, it is not obvious from a theoretical perspective that the traditional norma-

tive economic framework is well-suited for merger policy, especially if mergers can have important welfare impacts on a number of individuals in several distinct markets.

The "Lessening of Competition" Legal Approach Competition laws or jurisprudence rarely refer to anti-competitive mergers explicitly as those that "result in a deadweight loss for the economy." For a

majority of antitrust legal statutes in industrialized countries, anti-competitive mergers are referred to as those that would either lessen competition (substantially) or those that would result in or strengthen a dominant position.22 While both Canadian and American antitrust laws adopt the "lessening (or prevention) of competition" framework, each juris- diction's jurisprudence outlines important differences between their respective approaches to market power.

In the United States, the Supreme Court held in NCAA v. Board of Regents of the University of Okla- homa (1984, 107) that Congress had designed the Sherman Act as a total welfare prescription. Further, the Ninth Circuit Court in Rebel Oil Co. v. Atlantic

Richfield Co. elaborated:

Reduction in competition does not invoke the Sherman Act until it harms consumer welfare. Consumer welfare is maximized when economic resources are allocated to their best use, and when consumers are assured competitive price and

quality. Accordingly, an act is deemed anti-competitive under the Sherman Act only when it harms both allocative efficiency and raises the prices of

goods above competitive levels or diminishes their

quality (1995, 1433, emphasis added).

Accordingly, a merger increasing prices above their

pre-merger levels is necessary but not sufficient to warrant a legal challenge under US competition law. Allocative efficiency losses must also result for a merger to be found to lessen competition.23 Note




306 Marc Duhamel

that this "Efficiency-SLC" framework does not mean that US merger policy is consistent solely with the

traditional normative economic objective of total welfare. In particular, it is consistent with the ob-

jective of preventing "wealth transfers" arising from

anti-competitive conduct (Lande 1982).

In Canada, several of the Competition Tribunal's decisions indicate that a substantial lessening of

competition is found when a merger is likely to raise

prices (substantially) of goods or services.24 For

example, the Tribunal articulated in Hillsdown:

A merger will lessen competition if it enhances the ability of the merging parties to exercise "market power" by either preserving, adding to or

creating the power to raise prices above competitive levels for a significant period of time. One considers the degree of any such likely increase and whether by reference to the particular facts of the case it should be characterized as substantial (1992, 45).

Therefore, it is the divergence from the pre-merger prices (adjusted for quality) that matters. For later reference, label such a framework the "Price-SLC"

legal framework.

A normative antitrust paradigm consistent with the Efficiency-SLC legal framework considers that

competition is lessened by an increase in market

power only if it is detrimental to the efficiency of the economy. Under this normative paradigm, two conditions are required to determine that a merger lessens competition such that an antitrust enforcement action is warranted: a firm's market power must increase and the increase in market power must be harmful to the efficiency of the economy. Increas- ing price above its competitive level warrants an antitrust action only if it imposes deadweight-loss on society. On the other hand, a normative antitrust paradigm consistent with the Price-SLC legal framework only requires an increase in price to justify an antitrust enforcement action.

One should also note the following. First, because it requires deadweight loss, the Efficiency-SLC le-

gal framework implies the Price-SLC framework. Second, the Efficiency-SLC framework does not

directly object to wealth transfers between different individuals following an increase in market

power. However, the Price-SLC legal framework

object to such wealth transfers from increased market power because it focuses on the status quo (or pre-merger) price levels. Third, those legal frameworks are not affected by the consideration of efficiencies in legal proceedings (i.e., there is no

change in the legal framework adopted to determine an SLC when evidence of efficiencies is

introduced).25

In the US, efficiency gains are considered within the legal framework that determines whether a

merger is likely to lessen competition.26 The joint Horizontal Merger Guidelines of the Federal Trade Commission (FTC) and US Department of Justice, Antitrust Division (US DoJ-AD) specify a "price standard" for mergers where efficiency gains must offset the price increases from a merger.27 In such cases, there is no lessening of competition since neither price increases nor allocative efficiency losses result from the merger.

The legal framework adopted in Propane only considers efficiency gains after it has been deter- mined that a merger was likely to lessen competition. The Competition Tribunal did not adapt its Price- SLC framework to include considerations of allocation of economic resources despite its inter-

pretation about the underlying normative goals of the merger provisions of the Competition Act. In a case involving the efficiency defence, the Tribunal re-affirmed in Propane I (at para. 422) that "an anti-

competitive horizontal merger is a transaction that creates or enhances market power in the merged entity, the exercise of which leads to a higher price for the same good or reduced quality therein at the same price."





ON THE EXISTENCE OF DISTRIBUTIONAL OBJECTIONS TO MARKET POWER

Most problematic mergers make some individuals worse off and some individuals better off. For sim-

plicity, assume that some consumers c are made

worse off by the merger by an amount aUc/ayc dyc and an equal number of managers-shareholders (producers) p are made better off by an amount

aUP/ayP dyP where Ug U and yr are respectively the welfare function and monetary income of an individual in group g=c,p.28 From a welfare economics perspective, the practical choice of chal-

lenging such a merger requires a determination of whether the welfare gains of the winners are more

preferable to society than the welfare losses of those who are on the losing side.

Adapting the analysis of Townley (1999, Appen- dix A), let W = W (Uc (yC),UP (yP)) represent the

restricted Bergson-Samuelson social welfare function underlying the legislator's intent. If there are some costs related to the enforcement of merger law, a merger should not be challenged if

aw auc c aw aup dW= dyC + --

y dyp > O

aUc dyc aUP ayp

Because information about either W/lUg or

aug/ayg for g=c, p is sometimes difficult to ob-

tain, the traditional economic approach simply adds the monetary gains and losses dyc + d/y such that a

merger should be challenged if the sum is negative.

Following Harberger (1971), this approach at- taches equal social value to the extra dollar a rich

manager-shareholder would spend on a slightly more

expensive bottle of wine to the dollar a poor single parent-consumer would spend on slightly more nu- tritious food for his or her child. Of course, such a value judgement, as any other, lacks foundation from a positive perspective.

Assuming that the merger policy's principal in- tention is the promotion of society's welfare, there are at least two distributional issues that arise. The first one focuses on whether one group of individuals should be treated differently than the other

simply because they can be identified as belonging to this group. In merger policy, this could mean treat-

ing consumers differently than producers (e.g.,

aW/auc > aW/laUP ).29 The second one is concerned with differences in the relative marginal

utility of income (e.g., Uc /ayc >aUP/ayP ). This could mean treating mergers differently de-

pending on the relative income of consumers and

managers-shareholders.

The latter equity concern has been the central dis-

puted issue in the Propane case. In its understanding of the "balancing weights" efficiency defence standard, the Federal Court of Appeal agreed with the broad

principles outlined in Townley (1999) and confirmed the legislator's intent to consider differences in mar-

ginal utility of income between consumers and

producers in section 96 (i.e., the socially adverse effects of the wealth transfer) in back-to-back appeals.30

The judicial decisions in the Propane case are not sufficient to establish the existence of distributional objections to market power. First, the judicial decisions are made within the context of section 96, and it is not clear that such distributional objections would be considered in cases not involving effi-

ciency gains. Second, the Propane case did not

directly address the legal issue of whether consumers should be treated differently than producers if their

marginal utility of income was the same in the absence of efficiency gains. The evidence outlined by Townley (1999, 45) proceeds on the basis that Canadian merger law does not discriminate between consumers and

producers (i.e., aW/lac =aw/laU) without

any formal justification. The balancing weights method assumes that individuals in different groups should be treated equally as long as they have the same marginal utility of income.




308 Marc Duhamel

Recognizing the importance of transactions costs in antitrust rules, challenging a merger that solely redistributes economic resources between individuals can reduce social welfare.3' When there are costs associated with the enforcement of merger policy, society's economic well-being is reduced by an enforcement action when aggregate economic resources are unchanged. Transactions costs rule out the possibility for a merger legal framework to al- low successful challenges to mergers that do not reduce the aggregate amount of economic resources, unless the merger reallocates resources to higher marginal utilities of income. If one can successfully challenge a merger that does not result in any deadweight loss and involves a transfer of resources from rich consumers to poor shareholders, then it

implies that the Price-SLC merger legal framework favours the pre-merger allocation and distribution of economic resources.

Such mergers can be successfully challenged under the Price-SLC merger legal framework. In such circumstances, the welfare treatment of the wealth transfer from a buyer to a seller is inconsistent with the potential Pareto improvement criterion. Because the Price-SLC merger legal framework does not take into account differences in marginal utility of income, it establishes strict social preferences with respect to the status quo allocation of economic resources. Without explicit compensation mecha- nisms specified in the merger legal framework, such social preferences for the pre-merger allocation of economic resources are inconsistent with the potential Pareto improvement criterion.

A logical argument can be produced to support this view. Consider the following observations de- rived from judicial decisions by the Competition Tribunal in Canadian merger cases. First, the judicial decisions from Hillsdown, Southam, and

Propane establish that the Competition Tribunal relies on the Price-SLC legal framework for mergers under section 92 of the Competition Act.32 Second, these judicial decisions also establish that the relative marginal utilities of income of consumers and

producers are not considered in the determination that a merger is likely to result in a lessening of

competition. Finally, when none of the section 92

exceptions (including section 96) are applicable, an order under section 92 would likely be obtained from the Competition Tribunal. This result can be stated as follows:

Main Proposition: Assume antitrust enforcement is costly. If the underlying objective of the Com-

petition Act is to promote the economic welfare of society, then the economic welfare of society is inconsistent with the Potential Pareto Improve- ment criterion.

A reductio ad absurdum demonstration is immediate from the observations made above. Suppose that economic welfare of society is consistent with the

potential Pareto improvement criterion, then a

merger that increases market power but does not create any deadweight loss does not reduce the economic welfare of society. Given the Competition Act

promotes the welfare of society and the existence of merger enforcement costs, a merger that does not create any deadweight loss cannot be successfully challenged and an order under section 92 cannot be issued by the Competition Tribunal. This contradicts the observations above.

This result obtains from three key observations:

(i) the adoption by the Competition Tribunal of the Price-SLC legal framework, (ii) the presumption that the underlying objective of the Competition Act for

mergers is to promote the economic welfare of the Canadian society, and (iii) the recognition that enforcement of merger policy is costly. It provides further arguments, in addition to those articulated

by the Federal Court of Appeal, supporting the view that Canadian merger policy does not separate equity from efficiency issues. But, it does not imply that Canadian merger law favours the poor.

The result specifies distributional objections to increases in market power with respect to the status quo allocation of resources. By protecting or main-





taining the status quo-prices (i.e., prices that existed or would have existed in the absence of the merger), the underlying objective of Canadian competition policy is equivalent to preserving the status quo allocation and distribution of economic resources of the economy. Because the status quo allocation of economic resources forms much of the distributional concern in the Price-SLC legal framework, the normative objective of merger law cannot be consistent with the traditional normative economic paradigm about market power and the principle that "a dollar is dollar."

Since most mergers would imply some

deadweight loss, the practical relevance of the result

may appear minimal.33 However, the Competition Tribunal, the Federal Court of Appeal and both parties' arguments in the redetermination proceedings of Propane made clear that evidence on the magni- tude of deadweight loss is relevant only in the context of section 96(1) of the Competition Act.34

The argument that the mere existence of the effi-

ciency defence provision (section 96) justifies the abstraction from distributional issues in merger policy can also appear to jeopardize the practical relevance of the result. However, if the mere pres- ence of an efficiency defence justifies the abstraction from status quo equity concerns, it would require the Competition Tribunal to adopt different legal frameworks when an explicit efficiency defence is not adduced. However, the Price-SLC legal framework adopted for mergers has been consistently applied to other provisions that do not have explicit efficiency defences by the Competition Tribunal.35 Moreover, when one considers the efficiency defence provision, section 96(3) does not explicitly mention that pecuniary transfers from consumers to shareholders should not be counted as an anti-

competitive effect of prevention or lessening of

competition to be measured against the efficiency gains.36 Such an asymmetry in the treatment of wealth transfers between two individuals suggests that the normative objective of Canadian merger policy is not indifferent to wealth redistribution.

COMPETITION VS. WELFARE

By relying mostly on arguments that ignored distributional objections to market power a priori, for example, on grounds that political or distributional factors are controversial and difficult to quantify, the supporters of the traditional economic normative paradigm have failed to provide a positive answer to Justice Reed's question in Hillsdown of whether a wealth transfer from consumers to producers is neutral.37 In addition to the recent decisions by the Federal Court of Appeal in the Pro- pane case, this paper provides further evidence of a conflict between the traditional economic and legal normative objective for competition policy in Canada.

The objective of preserving the status quo allocation and distribution of economic resources can

appear at odds with the public finance perspective of antitrust policy (Musgrave and Musgrave 1976, 84) and (Rawls 1999, 244). However, it recognizes the dual role of market prices of allocating and dis-

tributing economic resources in market economies highlighted, see Meade (1964) among others. This is consistent with the primary objective of protecting competition for merger policy rather than promoting welfare.

Many observers argue that the restrictive trade practices reviewable by the Competition Tribunal

(e.g., mergers, exclusive dealings) have a different

underlying competition policy objective than other

anti-competitive practices such as conspiracies.38 The problem with this argument is that it is either inconsistent with most, if not all, judicial decisions that interpret a lessening of competition as an anti- competitive price increase or dismisses the consumer protection objective of the Act that some attribute to the statute and its predecessor.

For example, in moving the second reading of Bill C-91 (to enact the Competition Act), the minister of consumer and corporate affairs stated:




310 Marc Duhamel

The fourth but not the least objective is to provide consumers with competitive prices and

product choices. As such, this objective becomes the common denominator in what we are trying to achieve. This is the ultimate objective of the Bill.39

Stanbury and Gorecki explain that

proponents of the law of 1889 believed that

prices, particularly of the necessaries of life should be set by the forces of competition. Free and open competition would protect the interests of consumers and the interests of businessmen who wanted to prosper by offering to the public lower prices, higher quality, or new types of

goods and services (1984, xviii).

Indeed, several courts have interpreted the objective of the predecessor of the current merger law

(the conspiracy provisions) to exclude efficiency considerations. Case in point, the Supreme Court of Canada observed in R v. Nova Scotia Pharma- ceutical Society:

This Court has made numerous remarks on the

public-policy interests underlying [the conspiracy section] of the Act. These remarks are perhaps best summarized in this passage from the majority judgement in [[34]] at p. 411: "The statute

proceeds upon the footing that the preventing or

lessening of competition is in itself an injury to the public. It is not concerned with public injury or public benefit from any other standpoint." Considerations such as private gains by the parties to the agreement or counterbalancing efficiency gains by the public lie therefore out- side of the inquiry under [the conspiracy provision]. The only issue is whether the agreement impairs competition to the extent that it will attract liability.

Thus, Canadian jurisprudence suggests that the maintenance of competitive behaviour or outcome is an end in itself for competition law. It is then less

surprising to find the Competition Tribunal supporting a total welfare approach to merger law in

Propane I by stating:

The Act seeks to obtain the benefits of a com-

petitive economy. As set out in the purpose clause, these benefits, which we have characterized as the objectives of competition policy, are economic efficiency and adaptability, the expansion of opportunities for Canadian participation in world markets and openness to foreign competition at home, opportunities for small businesses to participate in economic activity, and competitive consumer prices and product choices. Under the purpose clause, the Act seeks to achieve these

objectives by maintaining and encouraging com-

petition (At para. 407, emphasis added).

The parallel between these judicial decisions and the results of this paper can also be made with other

disciplines that have considered the role of competition. First, the contractarian idea in political philosophy considers competitive prices are "just" or "fair."40 Second, this normative objective for

competition policy is also consistent with the "entitlement" or "endowment-based" criteria of distributive justice.41

CONCLUSION

This paper develops a logical argument that shows Canadian merger law to be inconsistent with the view that the harm of market power should be lim- ited to deadweight loss. Applying the merger legal framework established by Canadian jurisprudence, it is shown that a merger that results in wealth redistribution from an increase in market power with de minimis deadweight loss would likely cause the

Competition Tribunal to issue an order directing the parties not to pursue the merger. This suggests that the underlying normative objective of Canadian merger law objects to wealth redistribution from the pre-merger status quo allocation following an





increase in market power. This implies that the normative objective of Canadian merger policy is inconsistent with the potential Pareto improvement criterion and the traditional normative economic

paradigm of applied welfare economics.

The social welfare objective of Canadian merger policy is consistent with the objective of preserving the competitive allocation and distribution of economic resources of the Canadian economy. While it

may appear at odds with public finance perspective of maximizing allocative efficiency (i.e., utilitarian) that is often associated with competition policy, the

paper's result is consistent with the entitlement criteria of distributive justice.

In order to reconcile this paper's findings with the view that the normative objective of Canadian

competition policy should be to maximize the effi-

ciency of the Canadian economy, a legal re-interpretation of lessening of competition is re-

quired from either the Competition Tribunal or Canadian legislators. Current legislative amend- ments of Canadian merger law (Bill C-249) indicate that Canadian legislators are not pursuing this normative objective.

NOTES

The views expressed in this paper are solely those of the author and are not purported to be those of the Competi- tion Bureau, Industry Canada or the Government of Canada. I thank Chuck Blackorby, Steve Ross, Tom Ross, Guofu Tan, Peter Townley, Greg Werden, Moin Yahya, the editor and anonymous referees for insightful comments and suggestions. I also thank Andy Baziliauskas, Lourdes DaCosta, Jennifer Quaid, Brian Rivard, Michael Trebilcock and session participants at the Canadian Law and Economics Association Meetings for discussions. Most generous hospitality from the Sauder School of Business of the University of British Columbia is grate- fully acknowledged.

'For example, see Schwartz (1992), Crampton (1994), McFetridge (1996), and Trebilcock and Winter (2000).

In 1986 the Competition Act replaced the Combines In-

vestigation Act of 1889 and represented major legislative reforms to Canadian competition law and policy with respect to mergers and the abuse of dominant position (Khemani and Stanbury 1991).

2Created in 1986 when the Canadian Parliament enacted the Competition Act, the Competition Tribunal is an administrative adjudicative body that decides all ap- plications made under Parts VII.1 and VIII of the Competition Act. The Competition Bureau is responsible for the administration and enforcement of the Competi- tion Act. It performs the investigative and prosecution functions under Canadian merger law.

3See online at <http://www.parl.gc.ca/37/2/parlbus/ chambus/house/bills/private/C-249/C-249_2/C- 249_cover-E.html>.

4Among others, see Mas-Collel, Whinston and Green (1995, ch. 10).

5In particular, see Musgrave and Musgrave (1976).

6See Williamson (1968a, 1968b, 1969, 1976). Bork (1978) strongly supports a "total welfare" normative approach in competition policy but incorrectly labels the approach a "consumer welfare" approach.

7For example, see Pitofsky (1979) and Landes and Posner (1981).

'Notable exceptions include Lande (1982) and Thorelli (1955). Ross (1993, ch. 1) offers a good overview of the state of the debate surrounding a positive determination of the underlying goals of American antitrust policy.

9 In opposition to substantial, de minimis means that the evidence in a legal proceeding lacks significance or importance. Such evidence is so minor that it should be disregarded by the adjudicator.

'lThis criterion can be stated as follows: a change in the allocation of economic resources causes a potential Pareto improvement if those who would gain from it could, hypothetically, afford to compensate those who would lose and still be better off, and those who would lose could not afford to induce gainers to forgo the change in the allocation of economic resources. In applied welfare economics, it is sometimes called the "compensation" criterion.




312 Marc Duhamel

"See the documentation available at the International

Competition Network Web site at <http:// www.internationalcompetitionnetwork.org>.

12Also, see Lande (1989) and Averitt and Lande (1997).

1"For example, Ross (1984, 1985) derives a procedure to uncover the relative social welfare weights attached to consumers and producers from the regulators' pricing decisions, estimated demand elasticities and firms' cost estimates. This paper is also related to McFadden (1975) who derives bureaucratic preferences for discrete alter- natives from consequences and outcomes of bureaucratic decisions applied to the criteria used for freeway selec- tion by the State of California.

14In addition to the ones already provided, see

Broadley (1987), Church and Ware (2000), Viscusi, Vernon and Harrington Jr. (1995), and Crampton (1993).

15Because there is a voluminous literature that indicates that both economic and legal definitions of market

power in antitrust are similar, differences between legal and economic approaches to market power do not origi- nate from misunderstandings of the concept of market

power. For example, Carlton and Perloff (1994, 922) de- fine market power as "the ability of a firm to set price profitably above competitive levels (marginal cost)." Landes and Posner outline a definition where "the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded" (1981, 937). In Canada, the Competition Tribunal has adopted-similar definitions for the purpose of enforcing the merger provisions of the Competition Act. In Hillsdown, it noted that "market power in the economic sense is the ability to maintain prices above the competitive level for a considerable period of time without such action being unprofitable." In Director of Investigation and Research v. Southam Inc. et al. (hereafter, Southam), the Tribunal added that "market power is the ability of a firm or group of firms to maintain prices above the com-

petitive level" and that "market power may also be exercised by offering, for example, poor service or quality or by restricting choice. When used in a general context, 'price' is thus a shorthand for all aspects of firms' actions that bear on the interest of buyers."

6(Cairns 1995) outlines various desirable properties of market power indices and proposes the use of price

indices as pure measures of competition rather than mixed measures of market power and efficiency.

7According to Kaldor (1939), the compensation criterion states that a state A of resource allocation is

preferable to another state B if, in state A, it is hypothetically possible to undertake costless lump-sum redistribution and achieve an allocation that is superior to the other state B according to the Pareto criterion. Note that if redistribution was actually carried out, a Pareto

improvement would result.

18Total surplus is an approximation of the latter two methods which are both based on exact measures of individual welfare change (Boadway and Bruce 1984, ch. 7).

19For example, see Blackorby and Donaldson (1990), Blackorby (1990), Hammond (1990), Boadway (1994), and Stiglitz (1994).

20See Sen (1988, ch. 2).

21See Blackorby and Donaldson (1990) for a careful statement of these conditions.

22For a good description and overview of alternative le-

gal frameworks in merger policy, see the International

Competition Network at Web site <http://www. internationalcompetitionnetwork.org/afsguk.pdf>.

23To simplify the discussion later, label this legal framework for mergers the "Efficiency-SLC" framework.

24See Goldman and Bodrug (1993).

25However, these legal frameworks have different im-

plications regarding the effectiveness and consistency of

legal rules dealing with efficiency gains (Duhamel 2001).

26 Roller, Stennek and Verboven (2000) describe this

approach as the "rebuttal" method of considering effi-

ciency gains in merger policy in contrast to the "efficiency defence" approach.

27Since the US Supreme Court never considered the treatment of efficiency in horizontal merger cases, much

emphasis has been given to the US antitrust agencies' administrative policy regarding the treatment of efficiencies in mergers.

28For simplicity, implicit in these assumptions are

dyc < 0,dyP > 0 and consumers and manager-shareholder are identical within each group of individuals. Other in-





dividuals in society not affected by the merger are indifferent.

29Because each individual can be a consumer in some circumstances and a manager-shareholder in another cir-

cumstance, or both, such differential treatment does not

imply the violation of strict anonymity.

30The balancing weights efficiency defence standard establishes (constant) relative welfare weights of affected individuals in a social welfare function similar to

Harberger (1978).

31See Calabresi (1991) and Joskow (2002).

321n other words, a substantial price increase is considered to be a substantial lessening of competition by the Competition Tribunal.

33Alternatively, the same concerns could arise if the

Competition Tribunal considered that an increase in market power always resulted in the creation of a significant amount of deadweight loss.

34Evidence of deadweight loss is only required to quantify the anti-competitive effects of the substantial

lessening of competition.

35See Director of Investigation and Research v. The Nutrasweet Company, at p. 47 and Director of Investiga- tion and Research v. The D & B Companies of Canada Ltd, at p. 77.

36This argument has been interpreted by the Commis- sioner of Competition and others (e.g., Fisher, Lande and Ross 2000), as directing a consumer surplus standard. At the re-determination proceedings, the Competition Tri- bunal and the recent Federal Court of Appeal decision

rejected such an interpretation. Duhamel and Townley (2003) provide additional arguments against this standard.

37For example, see Schwartz (1992), Sanderson (1997), Crampton (1994), McFetridge (1998), Trebilcock and Winter (2000), and Mathewson and Winter (2000).

38For example, see Nozick (1996, 160-62).

39The citation is from: House of Commons Debates, 7

April 2001, at 11927. See also, Propane Appeal I at paras. 89, 100-102 (Evans, J.A.) and 16 (L6tourneau, J.A.).

40See, for example, Rawls (1999, 239-40).

41The "utilitarian" criterion underlies the traditional

economic normative approach to competition policy. For

example, Musgrave and Musgrave (1976, 85) argue that

competition policy should be consistent with the utilitarian criterion of distributive justice. Boadway and Bruce

(1984, ch. 6) describe both criteria of distributive justice and their historical origin.

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316 Marc Duhamel

APPENDIX SELECTED SECTIONS OF THE COMPETITION ACT

Section 1.1 The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian

participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices.

Section 91 In sections 92 to 100, "merger" means the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, sup- plier, customer or other person.

Section 92 (1) Where, on application by the Commissioner, the Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially (a) in a trade, industry or profession, (b) among the sources from which a trade, industry or profession obtains a product, (c) among the outlets through which a trade, industry or profession disposes of a product, or (d) otherwise than as described in paragraphs (a) to (c), the Tribunal may, subject to sections 94 to 96, (e) in the case of a completed merger, order any party to the merger or any other person

(i) to dissolve the merger in such manner as the Tribunal directs, (ii) to dispose of assets or shares designated by the Tribunal in such manner as the Tribunal directs, or

(iii) in addition to or in lieu of the action referred to in subparagraph (i) or (ii), with the consent of the

person against whom the order is directed and the Commissioner, to take any other action, or

(f) in the case of a proposed merger, make an order directed against any party to the proposed merger or any other person

(i) ordering the person against whom the order is directed not to proceed with the merger, (ii) ordering the person against whom the order is directed not to proceed with a part of the merger, or (iii) in addition to or in lieu of the order referred to in subparagraph (ii), either or both

(A) prohibiting the person against whom the order is directed, should the merger or part thereof be

completed, from doing any act or thing the prohibition of which the Tribunal determines to be necessary to ensure that the merger or part thereof does not prevent or lessen competition substantially, or

(B) with the consent of the person against whom the order is directed and the Commissioner, ordering the person to take any other action.

Evidence

(2) For the purpose of this section, the Tribunal shall not find that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially solely on the basis of evidence of concen- tration or market share.

Section 93 In determining, for the purpose of section 92, whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, the Tribunal may have regard to the following factors:





(a) the extent to which foreign products or foreign competitors provide or are likely to provide effective

competition to the businesses of the parties to the merger or proposed merger; (b) whether the business, or a part of the business, of a party to the merger or proposed merger has failed or is likely to fail; (c) the extent to which acceptable substitutes for products supplied by the parties to the merger or proposed merger are or are likely to be available; (d) any barriers to entry into a market, including

(i) tariff and non-tariff barriers to international trade, (ii) interprovincial barriers to trade, and

(iii) regulatory control over entry, and any effect of the merger or proposed merger on such barriers; (e) the extent to which effective competition remains or would remain in a market that is or would be affected by the merger or proposed merger; (f) any likelihood that the merger or proposed merger will or would result in the removal of a vigorous and effective competitor; (g) the nature and extent of change and innovation in a relevant market; and

(h) any other factor that is relevant to competition in a market that is or would be affected by the merger or

proposed merger.

Section 94 The Tribunal shall not make an order under section 92 in respect of

(a) a merger substantially completed before the coming into force of this section; or

(b) a merger or proposed merger under the Bank Act, the Trust and Loan Companies Act or the Insurance

Companies Act in respect of which the Minister of Finance has certified to the Commissioner the names of the parties thereto and that the merger is in the best interest of the financial system in Canada.

Section 95 (1) The Tribunal shall not make an order under section 92 in respect of a combination formed or

proposed to be formed, otherwise than through a corporation, to undertake a specific project or a program of research and development if

(a) a project or program of that nature

(i) would not have taken place or be likely to take place in the absence of the combination, or

(ii) would not reasonably have taken place or reasonably be likely to take place in the absence of the combination because of the risks involved in relation to the project or program and the business to which it relates;

(b) no change in control over any party to the combination resulted or would result from the combination; (c) all the persons who formed the combination are parties to an agreement in writing that imposes on one or more of them an obligation to contribute assets and governs a continuing relationship between those

parties; (d) the agreement referred to in paragraph (c) restricts the range of activities that may be carried on pursuant to the combination, and provides that the agreement terminates on the completion of the project or program; and

(e) the combination does not prevent or lessen or is not likely to prevent or lessen competition except to the extent reasonably required to undertake and complete the project or program.

Limitation

(2) For greater certainty, this section does not apply in respect of the acquisition of assets of a combination.




318 Marc Duhamel

Section 96 (1) The Tribunal shall not make an order under section 92 if it finds that the merger or proposed merger in respect of which the application is made has brought about or is likely to bring about gains in

efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger and that the gains in efficiency would not likely be attained if the order were made.

Factors to be considered

(2) In considering whether a merger or proposed merger is likely to bring about gains in efficiency described in subsection (1), the Tribunal shall consider whether such gains will result in

(a) a significant increase in the real value of exports; or

(b) a significant substitution of domestic products for imported products.

Restriction

(3) For the purposes of this section, the Tribunal shall not find that a merger or proposed merger has brought about or is likely to bring about gains in efficiency by reason only of a redistribution of income between two or more persons.




on the social welfare objectives of canada's antitrust statute

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