🧶 getting excessive

🪤 unconscionable!

“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.”

(This quote is from a US Supreme Court case called “Trinko”, and it was from Justice Antonin Scalia.) 👻

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Canadians have generally found it difficult to reconcile the rate of price growth on their groceries with extraordinary profits of the major grocer’s in the pandemic’s wake (these profits have since slowed). A couple of months ago, I wrote about the distinct approaches of Greece and France with their respective ‘anti-inflation’ baskets. I thought that it was a neat intervention: either narrowly defined (~50 items) and compelled through legislation (Greece) or collaboratively and voluntarily established by the largest grocers (France). I got sort of destroyed on social media for pitching the concept (I’m resilient to the roasting) but I also got a lot of useful follow up questions in interviews.

In September, Prime Minister Trudeau announced that the federal government was calling on major grocery chains to stabilise grocery prices in the near future. The CEOs of these firms met with the federal Industry Minister shortly thereafter, and we should know more about potential plans from them by Thanksgiving weekend - which is pretty soon! 

There’s a lot of public anger towards the Canadian grocery sector, and a new expectation that the largest firms will be able to or should take steps to limit the rate of price growth - perhaps on certain items - in the near future, albeit temporarily. The policy announcement also generated a good amount of confusion and scepticism: was this new expectation an example of the government leaning into the power of these actors to coordinate, and thus a facilitation of cartel power? 

As policy people continue to consider the possibilities to prototype here, there is a view that there is actually little that can be done from a regulatory perspective to reliably bring grocery prices down without either subsidising grocers directly OR expecting them to incur substantial losses, and many have raised a legitimate concern that a sector-specific windfall tax (a competing idea, and on the menu of policy options) would simply be passed down to consumers in the form of even higher grocery prices. 

On the heels of that announcement, a private members’ bill from the NDP was introduced (the “Lowering Prices for Canadians Act”), with a key plank teased in a press release that the bill would allow the Competition Bureau to crack down on “price gouging” with increased fines aligned with those in place in the EU and Australia for ‘practices such as price-fixing and overcharging.’ BUT the actual legislation doesn’t mention price-gouging. 

I wanted to learn a little more, and it seems that Australia doesn’t actually have a prohibition on price gouging. Instead, they have enforcement only where the price can be characterised as being misleading - and we have that already in Canada (under false and misleading advertising provisions). 

Included in the NDP’s proposal is an amendment that could add an example of an abuse of dominance to include conduct that “directly or indirectly imposes excessive and unfair selling prices.” In most of the world, abuse of dominance provisions include the concept of “excessive” or “unfair” prices (basically - the charging of prices that are ‘unreasonable’ for a sustained period of time). The rule is found in Article 102(a) of the Treaty on the Functioning of the European Union. It is also found in UK law, where the seminal case of excessive prices involved - wait for it - groceries (bananas, actually). 🍌

It is worth noting that excessive pricing is not illegal under the United States’ Sherman Act. Back in the 80s, Canada largely based its competition laws on the US experience, despite our distinctive geography and smaller population. And almost no other country in the world replicated this model. Maybe that should change, maybe it will.   

If excessive pricing were illegal in Canada, then there would be a more obvious competition law solution to the higher-than-necessary prices that grocers may have implemented and the corresponding profits captured during the most intense periods of the pandemic - not to mention a host of other retailers (more on that in this Policy Options piece from CAMP’s Robin Shaban and Keldon Bester). But once again the terms of the Competition Act are not suited for regulating today’s Canadian economy effectively.  

What else? Many of the antitrust cases in the EU involving data privacy have actually been framed through excessive pricing. For example, in a UK class action suit (so, private action) Meta is said to have engaged in excessive pricing when it forced consumers to give away ALL of their personal information in return for the right to operate a Facebook account. 

Now, is there an actual difference between ‘excessive pricing’ and ‘price gouging’? It seems that people typically talk about price gouging when there is an external shock (extreme weather event, pandemic, you name it) and then a significant imbalance between a fixed amount of supply and a suddenly surging demand. That doesn’t require that any individual retailer have any market power, and the price surge is typically temporary. By contrast, the economic definition of “excessive pricing”(at least in the EU law, and in the NDP’s proposed legislation) is that it is one type of abuse of dominance that is prohibited. Basically: the firm that engages in the practice has market power, and the unfair pricing practice is more persistent. 

In Canada, there’s some ‘emergency’ legislation in a few provinces that permits provinces to regulate prices in the short-term (in an effort to prevent price-gouging). (The term used in Ontario’s is “unconscionable prices” - catchy). 

🪟 The policy window of opportunity to think about excessive pricing has been propped open by the public’s sustained interest in pricing behaviours. There seems to be a general sense that there is an appropriate buffer of markup that consumers are willing to tolerate. But when does that tip over, and how do we know that it has?

Addressing excessive pricing through legislation would not take a behavioural approach that discounts market size in favour of a one-size-fits-all rule applicable to all firms. Excessive pricing - under EU law and the NDP’s standard - would only be illegal if a firm first had market power.

It seems like we DO want to use competition law to target excessive prices. But maybe it’s not all that simple. I was chatting with Dr. Jennifer Quaid about this, and she cautioned that even in places where there is ‘unfair’ pricing, that does not mean the government has a licence to regulate prices. Excessive prices are a sign of dominance. But the competition problem - at the core - is dominance, not the prices themselves (think of them as an expression of dominance). And the relationship(s) between abuse of dominance and pricing is not as simple as looking at either higher margins or profits. It’s tied to having market power, and that means those higher prices and profits aren’t constrained by the discipline of other market participants. In heavily concentrated sectors, conscious parallelism makes it relatively easy for big players to collectively act in ways that the smaller players cannot constrain except at the fringes. But the key element is not whether a price is excessive in an absolute way relative to consumer preferences. It is that prices are being kept at levels that are higher than what market discipline would allow (which could still be higher than what consumers perceive as fair).

🃏 Here’s a wildcard all the same: should firms be mandated to disclose their markup on each product? Private firms would likely argue that such information is proprietary. Not knowing the profit margin on each item we purchase perpetuates an opacity that may not be necessary - it’s a norm we haven’t really questioned. The flip side of that coin is that such detailed price transparency could perversely lead firms to keep increasing that margin, mirroring how CEO pay has escalated in the wake of wage transparency laws. 

It seems that Canadians are pushing back on excessive pricing. But what excessive pricing is, how it is determined, how quickly that can happen, and by whom, is not clear. 

🙏🏼 Special thanks to the “regs” reader that chatted with me about this topic, sending me links and teaching me things. I appreciate it, and you. ❤️

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🏢 The Competition Bureau’s annual Summit is this Thursday, and it’s a great lineup. You can register to attend online and listen in.

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