[1995] 3 F.C. 557
A-1093-92
The Director of Investigation and Research (Appellant) (Applicant)
v.
Southam Inc., Lower Mainland Publishing Ltd., Rim Publishing Inc., Yellow Cedar Properties Ltd., North Shore Free Press Ltd., Specialty Publishers Inc., and Elty Publications Ltd. (Respondents) (Respondents)
Indexed as: Canada (Director of Investigation and Research) v. Southam Inc. (C.A.)
Court of Appeal, Isaac C.J., Pratte and Robertson JJ.A.—Vancouver, February 13, 14, 15, 16; Ottawa, August 8, 1995.
Competition — Appeal from dismissal of application for order requiring Southam to divest itself of community newspapers — Southam owned only area daily newspapers when acquired community newspapers — Whether Southam’s control of community newspapers likely to lessen or prevent competition substantially in area of print retail advertising — Competition Tribunal holding dailies, community newspapers in competition but not in same product market — Erred by requiring direct (statistical or anecdotal) evidence of high price sensitivity (willingness to switch products in response to price change), ignoring indirect evidence of substitutability i.e. functional interchangeability (use of both products for same purpose), inter-industry competition — Similar use and competitiveness sufficient to place daily, community papers in same market — Evidence of inter-industry competition rendering superior product argument inapplicable.
Administrative law — Statutory appeals — Appeal from Competition Tribunal’s dismissal of application for order requiring Southam to divest itself of community newspapers — Market definition question of law — Doctrine of curial deference not applicable — Standard of review correctness — Tribunal composed of judicial, lay members — Former having sole responsibility for determining questions of law — Issue not squarely within Tribunal’s area of expertise.
Federal Court jurisdiction — Appeal Division — Appeal from Competition Tribunal’s dismissal of application for order requiring Southam to divest itself of community newspapers — Tribunal holding daily, community newspapers not in same product market — Market definition question of law — Appeal within F.C.A.’s jurisdiction notwithstanding majority obiter dictum in Upper Lakes Group Inc. v. Canada (National Transportation Agency) (F.C.A.) adopting contrary position.
This was an appeal from the Competition Tribunal’s dismissal of the Director’s application for an order under Competition Act, section 92, requiring Southam Inc. to divest itself of two community newspapers published in the Lower Mainland of British Columbia. Southam Inc. owned the two Vancouver area daily newspapers, (the Pacific Dailies), which were circulated throughout the province, when it acquired the two community newspapers. The application alleged that control by Southam of the community newspapers was likely to lessen or prevent competition substantially in the supply of print retail advertising services in the Lower Mainland.
Average household penetration by daily newspapers, and the industry’s share of total net advertising revenues, has fallen over the last decade, while community newspapers have prospered due to the growing preference of retail advertisers for targeted marketing. One group of advertisers used the community newspapers because they offered a local penetration in their trading areas at a lower cost. Even large multi-outlet retailers have shifted their print advertising from “run-of-press” (advertising interspersed with editorial content) display ads to pre-printed insert ads which cost less and offer more control. Most flyer advertisers require high levels of penetration in their target markets which the community newspapers can provide. In an attempt to improve the performance of the Pacific Dailies, Southam implemented a flyer distribution business which delivered flyers on behalf of the papers’ advertisers to subscribers and non-subscribers, and introduced zone supplements containing advertising and editorial content of specific interest to a geographic community. The community newspapers responded by forming groups which offered advertisers multiple advertising at a discount.
The Tribunal held that the Pacific Dailies and the community newspapers were in competition, but were too weak substitutes to be considered part of the same product market. It drew on indirect evidence, such as product configuration, the views and behaviour of Southam, of individual community newspapers in the Lower Mainland, and of retail advertisers, and evidence relating to community newspaper groups. The Tribunal concluded that advertisers did not regard the products as highly similar, and that there was no evidence that advertisers were highly sensitive to the relative advertising rates of the dailies and the community newspapers. After discussing entry into and survival in the community newspaper publishing business, the Tribunal concluded that there was only a marginal likelihood that Southam’s acquisitions would result in higher advertising costs.
The Director argued that (1) the Tribunal failed to apply its own stated approach to market definition by requiring direct evidence of high price sensitivity on the part of advertisers, and (2) in concluding that the dailies and community newspapers were not in the same product market, the Tribunal ignored indirect evidence of substitutability. Southam argued that the Court lacked jurisdiction to deal with the matter of market definition as it was a question of fact for which leave was not sought pursuant to Competition Tribunal Act, subsection 13(2). Alternatively, the issues were within the Tribunal’s area of expertise and therefore its decision had to be accorded the curial deference prescribed by the Supreme Court of Canada in Pezim v. British Columbia (Superintendent of Brokers).
Held, the appeal should be allowed.
The adoption of the appropriate framework for determining product market and its proper application is a question of law. Whether the facts in a particular case satisfy the requirements of the framework is a question of mixed fact and law. As market definition is a question of law the Court had the requisite jurisdiction to hear the appeal notwithstanding Upper Lakes Group Inc. v. Canada (National Transportation Agency), [1995] 3 F.C. 395(C.A.) where the majority in obiter adopted a contrary position.
The doctrine of curial deference did not apply, and therefore the standard of appellate review was correctness. The scheme of the Competition Tribunal Act indicates that Parliament intended to establish a specialized tribunal to deal with issues in Part VIII. Curial deference is owed to decisions squarely within its expertise, but the problem herein was not of that kind. The Tribunal is composed of judicial and lay members. The former are not required to possess an expertise in competition law. The Act vests judicial members with sole responsibility for determining questions of law, while questions of fact and questions of mixed law and fact are to be decided by the members on a majority basis. As the definition of product market is a question of law, the criteria used to circumscribe that definition must be questions which, if necessary, go to the judicial member of the Tribunal for determination. There were also strong policy reasons supporting this conclusion. A definition of market which is too narrow may have the de facto effect of repealing the merger provisions of the Act. Conversely, a definition which is too broad could enjoin mergers which do not undermine the objectives of the Act.
The Tribunal erred by requiring direct (statistical or anecdotal) evidence of high price sensitivity, and ignoring other indirect evidence of substitutability, such as functional interchangeability and industry views/behaviour. Functional interchangeability emphasizes the product’s use and its physical characteristics. It focusses on the extent to which different products have similar qualities that allow them to be used for the same end use. Generally, functional interchangeability is regarded as a necessary but not sufficient condition to be met before products will be placed in the same market. With respect to advertising in the Pacific Dailies and the community newspapers, the Tribunal held that they were not functionally interchangeable because advertising in these publications did not serve the same purpose. The Tribunal erred in holding “multiple price/product” was not relevant for distinguishing between advertising in daily and community newspapers because community newspapers were more local than the Pacific Dailies. That the community newspapers were more local in nature did not go to the question of functional interchangeability, but to the behaviour of buyers as to preference for geographical scope. This latter subjective factor should not be mingled with the purely objective factor of functional interchangeability which focusses on use or purpose. “Multiple price/product” advertising is a sufficient use or purpose upon which to objectively conclude that advertising in the Pacific Dailies and the community newspapers were functionally interchangeable. This conclusion was further supported by the various product modifications, which were intended to increase the similarities in use between the daily and community newspapers. The Tribunal also erred in ignoring evidence of “broad” inter-industry competition. The evidence of broad competitiveness was sufficient to show that there was competition in fact between the Pacific Dailies and the community newspapers.
When evidence of functional interchangeability and of inter-industry competition and the supporting evidence was considered, it was clear that the dailies and the community newspapers were in the same product market.
Evidence of inter-industry competition rendered the superior product argument inapplicable. The superior product argument is that when a better product is introduced, it gradually replaces the existing product i.e. changes in price will not affect buyer choice. The superior product argument is an exception to the general framework of market definition analysis and cannot be used to mask competition where competition exists. That competition really existed was evidenced by Southam’s preoccupation with the success of the community newspapers and the combative measures which it initiated in response.
The first step in the merger analysis under sections 92 and 93, the product market issue, must not eclipse the second step, which is a determination of whether the impugned merger would lessen or prevent competition. Otherwise, the factors listed in sections 92 and 93 for evaluating the effects of a merger would be obsolete. The Tribunal must assess market shares or concentration, and evaluate that evidence having regard to the limitations in subsection 92(2). It must also consider the factors listed in section 93, and given the Court’s finding on product market, reconsider the argument that the acquisition prevented formation of an effective community newspaper group.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Clayton Act, 15 U.S.C. § 18 (1988), s. 7.
Competition Act, R.S.C., 1985, c. C-34 (as am. by R.S.C., 1985 (2nd Supp.), c. 19, s. 19), ss. 1.1 (as enacted idem), 92 (as am. idem, s. 45), 93 (as am. idem).
Competition Tribunal Act, R.S.C., 1985 (2nd Supp.), c. 19, ss. 3, 4, 10, 12(1), 13(2).
Federal Court Act, R.S.C., 1985, c. F-7, s. 52(c)(i) (as am. by S.C. 1990, c. 8, s. 17), (ii).
CASES JUDICIALLY CONSIDERED
APPLIED:
R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606; (1992), 114 N.S.R. (2d) 91; 93 D.L.R. (4th) 36; 313 A.P.R. 91; 74 C.C.C. (3d) 289; 43 C.P.R. (3d) 1; 15 C.R. (4th) 1; 10 C.R.R. (2d) 34; 139 N.R. 241; Tanguay v. Canada (Unemployment Insurance Commission) (1985), 10 C.C.E.L. 239; 68 N.R. 154 (F.C.A.); American Airlines, Inc. v. Canada (Competition Tribunal), [1989] 2 F.C. 88 (1988), 54 D.L.R. (4th) 741; 33 Admin. L.R. 229; 23 C.P.R. (3d) 178; 89 N.R. 241 (C.A.).
CONSIDERED:
Upper Lakes Group Inc. v. Canada (National Transportation Agency), [1995] 3 F.C. 395(C.A.); R. v. Hoffmann-La Roche Ltd. (Nos. 1 and 2) (1981), 33 O.R. (2d) 694; 125 D.L.R. (3d) 607; 15 B.L.R. 217; 62 C.C.C. (2d) 118; 24 C.R. (3d) 193 (C.A.); The Queen v. J. W. Mills & Son Ltd. et al., [1968] 2 Ex. C.R. 275; (1968), 56 C.P.R. 1; affd Mills (J. W.) & Son Ltd. et al. v. The Queen, [1971] S.C.R. 63; (1970), 14 D.L.R. (3d) 464; 1 C.C.C. (2d) 420; 64 C.P.R. 7; Bell Canada v. Canada (Canadian Radio-television and Telecommunications Commission), [1989] 1 S.C.R. 1722; (1989), 60 D.L.R. (4th) 682; 38 Admin. L.R. 1; 97 N.R. 15; Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557; [1994] 7 W.W.R. 1; (1994), 92 B.C.L.R. (2d) 145; 4 C.C.L.S. 117; United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316; (1993), 102 D.L.R. (4th) 402; 153 N.R. 81; Chrysler Canada Ltd. v. Canada (Competition Tribunal), [1992] 2 S.C.R. 394; (1992), 92 D.L.R. (4th) 609; 42 C.P.R. (3d) 353; 138 N.R. 321; United States v. du Pont de Nemours & Co., 351 U.S. 377 (1956); Brown Shoe Co. v. United States, 370 U.S. 294 (1962); United States v. Continental Can. Co., 378 U.S. 441 (1964); The Queen v. Canadian Coat and Apron Supply Ltd. et al., [1967] 2 Ex. C.R. 53; (1967), 2 C.R.N.S. 62; R. v. Canadian General Electric Company Ltd. et al. (1976), 15 O.R. (2d) 360 (H.C.); Canada (Director of Investigation and Research) v. Hillsdown Holdings (Canada) Ltd. (1992), 41 C.P.R. (3d) 289 (Comp. Trib.); Canada (Director of Investigation and Research) v. Chrysler Canada Ltd. (1989), 27 C.P.R. (3d) 1 (Comp. Trib.); U.E.S., Local 298 v. Bibeault, [1988] 2 S.C.R. 1048; (1988), 35 Admin. L.R. 153; 95 N.R. 161.
REFERRED TO:
Moreno v. Canada (Minister of Employment and Immigration), [1994] 1 F.C. 298 (1993), 107 D.L.R. (4th) 424; 21 Imm. L.R. (2d) 221; 159 N.R. 210 (C.A.); United States v. Columbia Steel Co., 334 U.S. 594 (1948); Times-Picayune Publishing Co. v. United States, 345 U.S. 495 (1953); Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., [1995] F.C.J. No. 1092 (C.A.) (QL).
AUTHORS CITED
Areeda, Phillip E. et al. Antitrust Law, Vol. IIA, Toronto: Little, Brown & Co., 1995.
Crampton, Paul S. Mergers and the Competition Act, Toronto: Carswell, 1990.
Goldman, Calvin S. and John D. Bodrug. “The Hillsdown and Southam Decisions: The First Round of Contested Mergers Under the Competition Act” (1993), 38 McGill L.J. 724.
Hay, G. A. “Market Power in Antitrust” (1992), 60 Antitrust L.J. 807.
Kalinowski, Julian O. von et al. Antitrust Laws and Trade Regulation, Vol. 3, New York: Matthew Bender & Co. Inc., 1995.
Macdonald, David. “Product Competition in the Relevant Market Under the Sherman Act” (1954), 53 Mich. L. Rev. 69.
Note. “The Market: A Concept in Anti-Trust” (1954), 54 Colum. L. Rev. 580.
Note. “The Supreme Court, 1963 Term” (1964), 78 Harv. L. Rev. 143.
Pitofsky, Robert. “New Definitions of Relevant Market and the Assault on Antitrust” (1990), 90 Colum. L. Rev. 1805.
Werden, Gregory J. “Market Delineation and the Justice Department’s Merger Guidelines”, [1983] Duke L.J. 514.
Werden, Gregory J. “The History of Antitrust Market Delineation” (1992), 76 Marq. L. Rev. 123.
APPEAL from Competition Tribunal’s dismissal of the Director’s application for an order requiring Southam Inc. to divest itself of two community newspapers acquired when it owned the only Vancouver area daily newspapers ((1992), 43 C.P.R. (3d) 161 (Comp. Trib.)). Appeal allowed.
COUNSEL:
Stanley Wong, J. Kevin Wright, Donald B. Houston for appellant (applicant).
Neil Finkelstein, Glenn Leslie, and John Quinn for respondents (respondents).
SOLICITORS:
Davis & Company, Vancouver, and Stikeman, Elliott, Toronto, for appellant (applicant).
Blake, Cassels & Graydon, Toronto, for respondents (respondents).
The following are the reasons for judgment rendered in English by
Robertson J.A.:
I — INTRODUCTION
This appeal is brought by the Director of Investigation and Research (the Director) from that part of the decision of the Competition Tribunal (the Tribunal) dated June 2, 1992 [(1992), 43 C.P.R. (3d) 161] (the decision) wherein the Tribunal dismissed the Director’s application for an order under section 92 of the Competition Act, R.S.C., 1985, c. C-34 [as am. by R.S.C., 1985 (2nd Supp.), c. 19, ss. 19, 45] (the Act) requiring Southam Inc. (Southam) to divest itself of two community newspapers published in the Lower Mainland of British Columbia. The Director was unable to persuade the Tribunal that Southam’s acquisition of the two community newspapers and its ownership of the only two daily newspapers published in the Lower Mainland was likely to prevent or lessen competition substantially in the retail print advertising market.
This appeal is of significance, not only because it is the first contested merger case under section 92 of the Act to reach this Court, but because it also raises three fundamental issues. The first stems from the Director’s allegation that the Tribunal erred in failing to apply its stated approach to product market definition. As will become apparent, the analytical framework for determining whether the products produced by two merging firms are sufficiently close substitutes so as to be placed in the same product market is critical to the achievement of the objectives underlying the merger provisions of the Act. The second and third issues represent two of Southam’s principal responses to the Director’s allegation.
First, while denying that the Tribunal committed any reviewable error, Southam maintains that the question of market definition is one of fact for which leave to appeal is required pursuant to subsection 13(1) of the Competition Tribunal Act, R.S.C., 1985 (2nd Supp.), c. 19. Such leave not having been sought, it is maintained that this Court lacks the requisite jurisdiction to review the Tribunal’s decision. Second, and alternatively, even if market definition is found not to be a question of fact, Southam maintains that the Tribunal’s findings on this issue fall squarely within its area of expertise and, accordingly, its decision must be treated with the degree of curial deference prescribed by the Supreme Court of Canada in Bell Canada v. Canada (Canadian Radio-television and Telecommunications Commission), [1989] 1 S.C.R. 1722, and more recently in Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557. Implicit in this argument is the understanding that “correctness” is not the appropriate standard of review in this appeal.
II — BACKGROUND
1. The Litigation
Southam is a diversified Canadian communication company whose principal business is newspaper publishing. Through a wholly-owned subsidiary, Pacific Press Limited, Southam currently owns the two Vancouver area daily newspapers, the Vancouver Sun and the Province (the Pacific Dailies). Both papers are circulated in the Lower Mainland of British Columbia and throughout the rest of the province. In a series of transactions carried out in 1989 and 1990, Southam acquired a direct or indirect controlling interest in thirteen community newspapers in the Lower Mainland, including the North Shore News and the Vancouver Courier. As well, Southam acquired three distribution businesses, two printing businesses and the Real Estate Weekly, a real estate advertising publication. Prior to the acquisitions, there were two independent competitors in the North Shore market for print real estate advertising: the Homes supplement of the North Shore News and the North Shore edition of the Real Estate Weekly.
Following these acquisitions, the Director applied to the Tribunal for an order pursuant to section 92 of the Act requiring Southam to dispose of its interests in the two community newspapers identified above, as well as the Real Estate Weekly. The Director alleged that control by Southam of the two community newspapers was likely to lessen or prevent competition substantially in the supply of print retail advertising services in various markets throughout the Lower Mainland. He also alleged that the acquisition of the North Shores News, with its Homes supplement, and the North Shore edition of the Real Estate Weekly would lessen or prevent competition substantially with respect to print real estate advertising services on the North Shore. In this appeal, we are not concerned with the dispute regarding Southam’s acquisition of the Real Estate Weekly. That issue is the subject of an appeal initiated by Southam for which separate reasons have issued (see Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., [1995] F.C.J. No. 1092 (C.A.) (QL). Accordingly, these reasons apply solely to that part of the Tribunal’s decision (now reported at (1992), 43 C.P.R. (3d) 161) dealing with the acquisition of the two community newspapers and the print retail advertising services which they and the Pacific Dailies offer.
2. Lower Mainland Newspaper Industry
An important source of revenue for the Pacific Dailies is the sale of advertising to retailers. In 1991, the Vancouver Sun and the Province generated in excess of $98 and $46 million respectively in advertising revenues. Prior to the acquisitions, Southam had no interest, direct or indirect, in any community newspaper in the Lower Mainland.
The North Shore News is a controlled distribution community newspaper delivered free of charge three times a week to approximately 62,000 households in areas of Vancouver collectively referred to as the North Shore. It is common ground that this is an extremely affluent area of Vancouver and thus of particular interest to Lower Mainland advertisers. Of the approximately 1,000 community newspapers in Canada, the North Shore News is one of the largest (decision, at page 242). In 1989, this newspaper generated gross advertising revenues of $9 million.
The Vancouver Courier is also a community newspaper distributed free of charge to households on the west side of the city of Vancouver every Wednesday and Sunday. The Sunday edition, however, is distributed to households on the east and west sides of Vancouver thereby increasing circulation to approximately 120,000. This community newspaper went into receivership in 1979 after attempting to publish on a daily basis, but subsequently was revitalized. In 1989, it generated gross advertising revenues of $4.5 million.
The daily newspaper industry has been in decline throughout North America over the last decade where average household penetration (the number of copies sold per 100 households) has fallen, as has the industry’s share of total net advertising revenues (decision, at pages 170-171). This phenomenon is equally applicable to the Pacific Dailies in the Lower Mainland. The Vancouver Sun’s average household penetration in its given city zone fell from 43% to 33% between 1985 and 1990. The Province’s penetration dropped from 25% to 22% during the same period (decision, at page 173).
While the Pacific Dailies are said to be “uncommonly weak” in the Lower Mainland, the Tribunal found that the community newspapers are “uncommonly strong” (decision, at page 268). Unlike any other Canadian city, there are prospering community newspapers in all parts of the Pacific Dailies’ city zone. The relative strength of these community newspapers is attributed to the growing trend of retail advertisers for targeted marketing. Retailers place a premium on advertising vehicles that allow them to focus their message on specific trading areas with high household penetration. Daily newspapers, with their broad geographic circulation and comparatively low household penetration levels, are said to be ill-suited to meeting those targeted needs (decision, at pages 271-272 and 277-278).
The decline of the Pacific Dailies in relation to the community newspapers was also explained by the Pacific Dailies’ high and largely fixed costs. One group of advertisers use the community newspapers because they obtain local penetration in their trading areas at a lower cost than is possible with the Pacific Dailies (decision, at pages 189-190 and 277-278). The comparatively high cost of advertising in the Pacific Dailies has also caused many large multi-outlet retailers to shift their print advertising from “run-of-press” display ads to pre-printed inserts or what are commonly referred to as “free-standing flyers”. These cost less to produce and offer advertisers more control over printing, quality design and distribution (decision, at page 246). Most flyer advertisers require high levels of penetration in their targeted markets, which the Pacific Dailies alone cannot provide. By comparison, community newspapers are ideally situated to meet the distribution demands of flyer advertisers (decision, at page 272).
In an attempt to improve the performance of the Pacific Dailies, Southam implemented a number of measures beginning in 1987. First, Southam introduced “Flyer Force”, a flyer distribution business which competed with the flyer services of the community newspapers. In so doing, Southam attempted to address the existing shortcoming in circulation and penetration by establishing an extended market coverage system in the Lower Mainland that would supplement the Pacific Dailies’ reach by delivering flyers on behalf of the papers’ advertisers to both subscribers and non-subscribers. Flyer Force lost an average of $2 million per year while in operation and was terminated in early 1991 following Southam’s acquisitions, with losses totalling approximately $10 million (decision, at page 194). Part of the 1989-1990 acquisitions included three flyer distribution businesses which Southam believed to be the only ones considered reliable by advertisers (decision, at pages 240-241).
As a further measure to improve the performance of the Pacific Dailies, Southam decided, in 1988, to build a new plant in Surrey. The primary purpose of the new plant was to introduce a more modern, lower cost facility than the existing one. However, the Surrey Plant proposal offered the additional rationale of contributing to the launch of zoned supplements by Southam as a means of competing with the community newspapers (decision, at pages 195-196). A zoned supplement is a section of a daily newspaper containing advertising and editorial content of specific interest to a geographic community within the newspaper’s circulation area. Southam did in fact proceed with one such supplement, the North Shore Extra, which was made part of the Vancouver Sun on the North Shore. It was also distributed by Flyer Force as a stand-alone publication to households on the North Shore which were not Vancouver Sun subscribers. The North Shore Extra was launched in September, 1988, but discontinued in April, 1990. Prior to its discontinuance, the North Shore Extra was losing $20,000 per month (decision, at page 197). Following the acquisitions, Southam did not proceed with its plan for zoned supplements in other parts of the Lower Mainland.
The community newspapers responded to these so-called “product innovations” introduced by Southam by forming groups offering advertisers the opportunity to purchase multiple advertising at a discount in one or more of the community newspapers within the group (see decision, at pages 257-259). The first successful effort was the formation of MetroVan in 1988 which included both the Vancouver Courier and North Shore News. Later in 1988, the MetroVan newspapers formed MetroGroup with ten community newspapers owned by Trinity Holdings Inc. Trinity Holdings also co-ordinated its papers’ discount rates through MetroValley. The purpose of MetroGroup was to challenge the Pacific Dailies for national and major retail advertising revenues in the Lower Mainland. The North Shore News and the Vancouver Courier remained members of the MetroGroup until acquired by Southam which, in 1990, established another community newspaper group, “VanNet Group”. That group consisted of twelve of the thirteen community newspapers acquired by Southam, including the Vancouver Courier and the North Shore News, as well as a number of other publications.
III — THE PARTIES’ POSITION BEFORE THE TRIBUNAL
1. The Director
On July 8, 1991, the Director filed an amended application for an order requiring, inter alia, the divestiture of the North Shore News and the Vancouver Courier on the ground that their acquisition by Southam was likely to prevent or lessen competition substantially in the market for “newspaper retail advertising services” in the North Shore and the city of Vancouver respectively. As to a “lessening” of competition, the Director alleged that the merger was “likely to enable Southam to unilaterally impose and maintain a material price increase in a substantial part of the [relevant retail advertising market] for a substantial period of time” (amended notice of application, Appeal Case, vol. 1, at pages 100 and 206). The Director argued that there were two ways in which a price increase could be implemented by Southam. First, it could raise the advertising rates in the North Shore News and the Vancouver Courier to supra-competitive levels. Alternatively, the Pacific Dailies as well as the two community newspapers could raise their rates (decision, at page 269).
The Director also alleged that the acquisition of the two community newspapers in question was likely to “prevent” competition substantially “for the supply of multi-market newspaper retail advertising services throughout the Lower Mainland” (amended notice of application, Appeal Case, vol. 1, at page 215). The thrust of this argument is that the acquisition of the two community newspapers in question, which were the strongest community newspapers in the Lower Mainland, prevented the formation of an effective community newspaper group that was independent of the Pacific Dailies (decision, at page 287). In short, the Vancouver Courier and the North Shore News would not be participating in a community newspaper group which could offer effective competition against the Pacific Dailies. The Director also alleged that the acquisitions would prevent entry by a new daily using the North Shore News or a successful community newspaper group as a springboard (decision, at page 287).
2. Southam
Southam’s initial argument was that the Pacific Dailies and the community newspapers are not in the same product market. That is to say that retail print advertising services in the Pacific Dailies is not a close substitute for that available from community newspapers, which offer higher household penetration at a lower cost when compared with the Pacific Dailies (amended response, Appeal Case, vol. I, at page 247). During the course of argument before the Tribunal, Southam maintained that retailers advertising in the community newspapers would not be sensitive to changes in price because they are using what they regard as a superior product, a product for which retail advertising in the Pacific Dailies is not a substitute (decision, at page 276). Alternatively, Southam argued that if the product market was found to embrace print advertising in both the Pacific Dailies and community newspapers then it would be appropriate to broaden the market to include all other advertising channels, including television, radio, free-standing flyers (decision, at pages 178-179). Failing these arguments, Southam maintained that the acquisitions did not substantially lessen or prevent competition in the relevant market.
IV — THE TRIBUNAL’S DECISION
1. Analytical Framework (decision, at pages 171-183)
The Tribunal stated that the central concern underlying merger analysis is whether the impugned merger will create, increase or preserve market power, which is defined as the ability of a firm or group of firms to maintain prices above the competitive level (decision, at pages 177-178). As a framework of analysis, the Tribunal accepted that it is first necessary to determine the relevant market within which market power can be measured. A relevant market has both a product and geographic dimension.
Since the geographic dimension of the market was not contested, the Tribunal addressed the product dimension in terms of whether the products offered by the merging firms are close substitutes. In turn, it was recognized that substitutability could be measured, at least in principle, by the extent to which buyers would switch from one product to another in response to changes in relative prices. As direct evidence of such, known as cross-elasticity of demand, was not available the Tribunal determined that it was necessary to draw on more “indirect evidence”. At page 179, the Tribunal set out the framework that was to be followed:
Whether two or more goods or services are close substitutes can in principle be measured by the extent to which buyers would switch from one to another in response to a change in relative prices. This measurement, the cross-elasticity of demand, is rarely available. In practice it is usually necessary to draw on more indirect evidence such as the physical characteristics of the products, the uses to which the products are put, and whatever evidence there is about the behaviour of buyers that casts light on their willingness to switch from one product to another in response to changes in relative prices. The views of industry participants about what products and which firms they regard as actual and prospective competitors are another source of evidence that is sometimes available. In this case, the views of industry participants—newspaper suppliers and advertisers, including representatives from advertising agencies—have been the main source of information. This has been supplemented by the view of experts concerning the extent to which media and advertising vehicles may be substituted. The Director has relied very heavily on the views expressed in the internal documents of Southam and Pacific Press regarding competition between the dailies and the community newspapers and the means of confronting that competition. [Emphasis added.]
The Tribunal’s extensive analysis (300 pages) deals initially with five topics: similarities and differences between daily and community newspapers in terms of product configuration; views and behaviour of Southam; views and behaviour of individual community newspapers in the Lower Mainland; views and behaviour of retail advertisers; and evidence relating to community newspaper groups. After arriving at certain critical conclusions regarding product market, the Tribunal proceeded to canvass two other topics: entry into community newspaper publishing and the matter of substantial lessening and prevention of competition.
Before reviewing the topics set out above, the Tribunal considered what was meant by “newspaper retail print advertising services” which had been alleged by the Director to be the relevant product market. The Tribunal held that it consisted of retail advertising using display, or “run-of-press” advertising, which is advertising interspersed with editorial content. By definition, classified advertising was excluded as was national advertising because of “price discrimination”, a concept which need not be addressed herein (decision, at page 181). However, the Tribunal also found that the product in question included flyers inserted into newspapers or otherwise delivered (decision, at page 183).
2. Similarities/Differences between Dailies/Community Newspapers (decision, at pages 184-190)
In the context of retail print advertising, the Tribunal found that the most important differences between daily and community newspapers are circulation, penetration and cost. Community newspapers offer high penetration in local areas, which the Tribunal found to be a relative strength over dailies. Differences in penetration and circulation also translate into different advertising rate structures for the Pacific Dailies and community newspapers. While the former’s advertising rates are much higher than the latter’s, the Tribunal found it difficult to make price comparisons because of the different attributes of the respective newspapers. Despite that difference, the Tribunal concluded that many retailers are willing to use either the Pacific Dailies or the community newspapers, or both, and that for them the critical considerations relate to coverage and penetration (decision, at page 187).
The Tribunal also found that many advertisers in community newspapers are local retailers who draw their customers exclusively or primarily from the area covered by the community newspaper. These local advertisers are attracted to the lower cost and higher penetration offered by community newspapers (decision, at page 189). The Tribunal found that 50% of the advertisers in the community newspapers were local advertisers whose trading area was too small to use the Pacific Dailies profitably. The Tribunal excluded this group of advertisers from the relevant market because these advertisers would not switch to the Pacific Dailies in response to small changes in relative price in the community newspapers. At pages 189-190, the Tribunal reasoned:
There is therefore no debate about the existence of a significant volume of advertising by retailers that do not qualify as part of the relevant market. The relative size and the price sensitivity of this group of advertisers are critical to a determination of the likely effects of the acquisitions. This group disciplines the ability of the community newspapers to raise prices in a way that is independent of competition with the dailies. If the community newspapers were to raise prices, roughly 50% of their retail advertisers (by revenue) would either swallow the increase or reduce their volume in part or altogether. While they might move to other vehicles, the dailies certainly would not benefit.
In light of this finding, the Tribunal indicated that it remained to be determined whether the remaining 50% of advertisers that use or might use the Pacific Dailies regard them and the community newspapers as substitutes “in the sense that these advertisers would change the volume of advertising from one vehicle to another in response to small changes in relative price” (decision, at page 190).
3. Views and Behaviour of Southam (decision, at pages 191-213)
The Tribunal found that Southam was concerned by the strength of the community newspapers in the Lower Mainland. However, it also held that the fact that Southam may have regarded the community newspapers as competitors was not in and of itself sufficient to place them both in the same product market: “Competition means many things to many people” (decision, at page 191). The issue remained whether the Pacific Dailies and community newspapers are effective substitutes for retail print advertising services. The Tribunal did acknowledge, however, that the views expressed by Southam were an “important source of information” and that the Director had relied heavily on the views expressed by Southam in its internal documents (decision, at pages 179 and 191).
In this regard, the Tribunal reviewed: (a) a consulting report prepared for Southam; (b) Southam’s introduction of a flyer distribution business and a zoned supplement on the North Shore; (c) Southam’s concern with respect to price sensitivity of advertisers; (d) Southam’s reasons for acquiring the Vancouver Courier and the North Shore News; and (e) marketing of the Pacific Dailies.
(a) The Urban Report (decision, at pages 192-193)
In 1986, Dr. Christine Urban, a newspaper industry consultant, was hired by Southam to prepare a study and to recommend strategies for improving the performance of the Pacific Dailies. Dr. Urban found that the community newspapers were at least partly responsible for the relatively low advertising revenues earned by the Pacific Dailies when compared to dailies operated by Southam in other parts of the country. In her report she stated (decision, at page 192):
What is the reason for this substantial difference in market performance seen between Vancouver and other markets? We believe strongly that it is the large number of aggressive weeklies in Vancouver, which are siphoning revenues (logically) due to the Sun and/or Province by virtue of their readership and market presence.
Dr. Urban’s report also considered several strategies for improving the performance of the Pacific Dailies. Ultimately, she recommended that Southam adopt a strategy to reduce the Pacific Dailies’ high costs. Although not part of her principal strategy, Dr. Urban also recommended that Southam “construct a strategy” to compete with the community newspapers. At page 192 of its decision, the Tribunal reproduced the relevant portion of her report:
Despite these factors, Pacific Press must consciously and proactively construct a strategy to aggressively compete with the weeklies: a strategy that, at worst, will continue to preserve the dailies’ 27% share and, at best, blunt the weeklies’ ability to form better/stronger confederations. It would be especially dangerous if the weeklies were given any “open” period of time in which to operate with impunity, consolidating the gains they may have made with major advertisers and having the opportunity to teach advertisers new comparative criteria for their selection of print media.
With respect to this passage, the Tribunal made two initial comments. First, the reference by Dr. Urban to the 27% share consisted of “total local advertising dollars spent on all media” in the Lower Mainland which suggested a broad view of the market. On the other hand, the Tribunal observed that “there is no discussion in the report that relates to media or advertising vehicles other than community newspapers.” The Tribunal accepted the fact that the community newspapers continued to gain strength after 1985 as evidenced by the fact that they had an increasing share of overall advertising revenues. The Tribunal concluded that the community newspapers in the Lower Mainland continued to grow relative to the Pacific Dailies (decision, at page 193).
(b) Flyer Force and North Shore Extra (decision, at pages 193-200)
As discussed earlier, Southam adopted a number of measures in an attempt to attract more advertising. The first was the introduction of Flyer Force, a flyer delivery system delivering to households in a given circulation area, including those that do not subscribe to the Pacific Dailies. The Tribunal found that while Flyer Force was in existence, the Pacific Dailies and the community newspapers were in the same relevant product market and that it was most likely that Flyer Force was discontinued for financial reasons and not because of the acquisitions (decision, at pages 195 and 197).
The second step adopted by Southam was the introduction of a zoned supplement. When the decision was taken in 1988 to build a new printing plant, one of the additional rationales offered for the project was that the plant could contribute to the planned launch of zoned supplements as a means of competing with the community newspapers. This rationale was offered by Mr. Perks, a Southam executive, in a document reproduced in part by the Tribunal at page 195 of its decision:
As shown in the 1986 Urban Report … the community newspapers in 1986 held an abnormally high share of the Lower Mainland print medium advertising and flyer distribution business.
Despite the introduction of Flyer Force, which in 1988 will produce $2 million positive swing in the contribution of inserts to Pacific Press, the community newspapers continue to consolidate their position. [This statement of Flyer Force’s contribution seems highly exaggerated in light of the available information on the Sun’s insert revenues discussed above.]
Pacific Press has delayed plans to launch the first “Sun Plus”, which is the working title for a series of weekly zoned products. Profit pressure in 1988 caused this delay. Unless we are prepared to concede (forever?) a substantial portion of what is normally daily newspaper business to the community newspapers, this project must be activated in 1989. [Emphasis added.]
Mr. Perks testified that he included the references to the zoned supplement at the request of the Pacific Dailies’ management and that he did not believe that the zoned supplement could succeed in regaining lost business. His view was that an “irreversible flow” to the community newspapers had occurred (decision, at page 196).
The North Shore Extra was the only community newspaper launched by Southam but was discontinued shortly after the acquisition of the North Shore News. With respect to the North Shore Extra, the Tribunal concluded that its introduction indicated that the Pacific Dailies, in their traditional format, were not in the same product market. The Tribunal asked: “If the dailies and the community newspapers are already in the same market, why would the dailies consider starting community newspapers?” (decision, at page 200). (The issue is not whether daily and community newspapers are in the same product market as suggested by this passage; see also decision, at pages 274-275 and the Tribunal’s ultimate conclusion on this point, at page 278.)
(c) Price Sensitivity of Advertisers (decision, at pages 200-201)
At page 200 of its decision, the Tribunal reproduced a portion of a Southam document suggesting that if one of the Pacific Dailies, the Province, were to raise its advertising rates substantially, that paper would lose its “low-end” advertisers. That document reads in part:
But none of these reasons will entice clients who cannot afford Pacific Press rates. They will be forced to go to the weeklies. If the Province were to dramatically raise its ad rates, Pacific Press would then be leaving the low end of the market to the weeklies.
The Tribunal concluded that this type of evidence was not useful in deciding whether two products are close substitutes in the sense that “a small change in the price of either product will result in a shift of purchases” (Tribunal’s emphasis). Evidence with respect to advertisers for whom affordability was not a problem was felt to be a better indicator of substitutability. The full reasoning of the Tribunal is found at pages 200-201:
Even this bald statement is not free of ambiguity with respect to substitutability between the dailies and the community newspapers. While some form of substitution is implied in the quotation, it is not of the sort that one ordinarily looks for in deciding that two products are close substitutes and therefore in the same market, namely, that a small change in the price of either product will result in a shift of purchases. The quotation implies that advertisers would be forced by limited budgets to switch from the dailies to the community newspapers. At least as important as the expressed concern about these advertisers is the absence of any reference to a loss of advertisers for whom affordability was not an issue. Movement by those advertisers to the community papers consequent upon a daily price increase would more clearly indicate substitutability.
(d) Reasons for Acquisitions—Prices Paid (decision, at pages 201-209)
The Tribunal considered whether the acquisition of the two community newspapers in question was for investment purposes or whether the motivation was to eliminate these newspapers as competitors of the Pacific Dailies and to preclude other potential buyers from taking advantage of the former’s strategic value (decision, at page 201). One strand of evidence consisted of documents prepared by Southam executives. Another strand related to the prices paid for the two community newspapers.
With respect to the documentary evidence, the Tribunal turned to a memorandum prepared by Mr. Perks and distributed to other executives in preparation for a meeting with the Southam board regarding the acquisition of the community newspapers. That document together with the testimony of Mr. Perks led the Tribunal to conclude that the acquisitions were intended to achieve three strategic purposes: (1) to prevent the possibility of the North Shore News being purchased for the purpose of launching a third daily in competition with the Pacific Dailies; (2) to preclude financial losses to the Pacific Dailies and a corresponding benefit to the community newspapers in the event of the former experiencing further labour problems; and (3) to prevent the formation of a hostile community newspaper group (decision, at page 202).
As to the strategic importance of the North Shore News as a springboard to a third daily, the Tribunal held that this evidence was not relevant to the issue of product market. Rather it went to the question of whether the acquisitions had the effect of substantially preventing competition (decision, at page 202).
With respect to the second strategic purpose, the Tribunal acknowledged the permanent losses suffered by Southam as a result of a number of labour strikes. The Pacific Dailies had been shut down by a strike in November, 1978, to July, 1979, and again for two months in 1984. A rumoured strike in 1987 never materialized. During these periods, the community newspapers benefitted greatly as “[c]ustomers of the dailies flocked to [the community newspapers] to fulfill their newspaper advertising needs” (decision, at page 204). However, the Tribunal characterized the fact that advertisers turned to community newspapers during strikes as “very weak evidence of substitutability since they had little choice” (decision, at page 204). Such evidence merely established that, in the short run, community newspapers are the closest substitutes for the Pacific Dailies. (These conclusions do not relate to the question originally posed. As for the third strategy, it was inexplicably dealt with under the issue “prices paid”.)
The evidence disclosed that Southam had paid a premium price for both the North Shore News and the Vancouver Courier (decision, at page 208). The Director argued that this evidence supported the view that these community newspapers were acquired for strategic or anti-competitive reasons and not for investment purposes. The Tribunal concluded that the two community newspapers were not purchased solely as stand-alone investments (decision, at page 209). The Tribunal then went on to determine that the evidence was inconclusive as to whether they were purchased for the purpose of defeating a hostile community newspaper group. The evidence merely showed that the Vancouver Courier and North Shore News were more valuable in combination than when operated and marketed separately (decision, at page 209).
(e) Marketing of the Pacific Dailies (decision, at pages 209-213)
In support of his argument that the Pacific Dailies and the community newspapers are in the same product market, the Director referred to market research efforts by the Pacific Dailies and to brochures and other marketing aids prepared for the use of their sales representatives when dealing with advertising clients. Generally, the Tribunal did not find the evidence helpful as the research efforts embraced all types of advertising and not just the print media (see decision, at pages 208-212).
Another strand of evidence related to the efforts of the Pacific Dailies to track those persons who were advertising in the community newspapers and the flyers carried by them for the purpose of identifying potential advertisers. While Southam’s witness testified that tracking had been confined to advertising in the flyers, the Tribunal accepted the evidence of the Director’s witness that tracking had been carried out with regard to both. The Tribunal concluded, however, that this evidence involved “only one of many strands bearing on the delineation of the product market” (decision, at page 213).
4. Community Newspapers’ Viewpoint (decision, at pages 213-218)
The Tribunal found that the sales department of the North Shore News monitors all media on the North Shore for leads, including magazines, television and radio, in addition to the Pacific Dailies. The only significant conclusion of the Tribunal is found at page 216:
Thus, it is apparent that North Shore News sales staff continue to approach all major daily advertisers. The North Shore News continues to survey its readers in order to develop arguments that their representatives can use when soliciting advertisers that use the dailies, with particular emphasis on comparative penetration.
5. Views and Behaviour of Advertisers (decision, at pages 218-257)
The Tribunal considered the anecdotal evidence of a number of advertisers regarding their use of electronic media and print advertising. With respect to the former, the Tribunal concluded that it was a weak substitute for print advertising and therefore these two products were not in the same market. The Tribunal reasoned that there are two ways to establish substitutability between print advertising and electronic media. One is through “a direct response to a price change that leads to a change in the use of advertising vehicles” (decision, at page 224). On this point, the Tribunal found that the witnesses did not refer to a “single case” where a switch was prompted by a change in prices. The other means of establishing substitutability was by reference to indirect evidence that the two vehicles are used for the same purpose. The Tribunal found that multiple price/product advertising cannot be produced effectively other than in print and particularly in newspaper display advertising and flyers. Accordingly, advertising on television and radio was found not to be close substitutes for display advertising purposes (decision, at pages 224-225).
As for those using display advertising, the Director produced several witnesses in support of his argument that retail advertisers in the Lower Mainland regard the Pacific Dailies and community papers as interchangeable vehicles for conveying their advertising message to consumers. The Tribunal found that the Director’s advertising witnesses were not always clear on the rationale for their print advertising strategies. As well, the Tribunal observed that the Director did not systematically pursue the question of price sensitivity as between daily and community newspapers (decision, at pages 235-236). Some witnesses were not asked how they would respond to a hypothetical price increase in either the Pacific Dailies or the community newspapers. Some who were so asked testified that they would not return to the daily newspapers even if confronted by a rate increase because of the latter’s poor penetration in the trading areas (decision, at pages 236-237).
The only other evidence of price sensitivity was a survey conducted by Angus Reid on behalf of Southam (see decision, at pages 251-257). However, the Tribunal held that the results of the survey could not be relied upon because of a serious methodological error made in the course of the survey. Consequently, the survey’s results were ignored by the Tribunal.
In the final analysis, the Tribunal found that there was no direct evidence that display advertisers would switch between the Pacific Dailies and community newspapers in response to a change in relative prices. With respect to indirect evidence of substitutability, the Tribunal held that the similar purposes achieved by advertising in the Pacific Dailies and the community newspapers should not be adopted when evaluating substitutability. At page 238, the Tribunal reasoned:
As with substitution between the print and electronic media, substitution between daily and community newspapers can be shown directly or indirectly. The first type of evidence has not been apparent in the testimony of the Director’s advertiser witnesses. The changes in newspaper use were not prompted by any discernible change in prices. With respect to indirect evidence of the use of both for the same purpose, it is a matter of determining whether “purpose” can be inferred from the content of the advertisement and the circumstances related to the use of a particular vehicle. Almost by definition it can be said that community newspapers are used to reach customers in the respective areas where the papers are distributed and that dailies are used to reach customers throughout the Lower Mainland. It is not helpful to adopt this notion of purpose when evaluating whether dailies and community newspapers are effective substitutes.
6. Community Newspaper Groups (decision, at pages 257-268)
In considering evidence relating to community newspaper groups, the Tribunal noted that it was not possible to determine whether the new business attracted to the community newspapers was a result of the availability of group discounts or “simple adjustments in the way existing advertisers deal with the various community newspapers” (decision, at page 262). The Tribunal concluded that while there was an increase in group sales, there was no evidence to suggest that such sales constituted new advertising business. In light of the data, it was reasonable to infer that the increased sales came from existing customers who would normally have placed their advertising directly with the community newspapers (decision, at page 262). The Tribunal’s formal conclusion at this stage reads as follows (at page 267):
In conclusion, on the basis of the available evidence the tribunal is not convinced that the multi-paper discount is an important factor in the community newspapers’ ability to attract business from the dailies or, in fact, that the new business coming to the community newspapers through the groups would otherwise advertise in the dailies.
7. Conclusions Regarding Product Market (decision, at pages 268-279)
The Tribunal found that “community newspapers are uncommonly strong in the Lower Mainland and the dailies are uncommonly weak”, a fact which concerned the Pacific Dailies and which caused them to seek “means of coping with the attraction of the community newspapers for advertisers” (decision, at page 268). In broad terms, the Tribunal concluded that the Pacific Dailies and the community newspapers were in competition but that “a more focused analysis” was required to determine whether they were in the same market.
In dealing with the product dimension of the relevant market, the Tribunal referred to two “conceptual frameworks” that ran throughout the evidence and argument (decision, at page 270). The so-called narrow framework focussed on Southam’s post-merger ability to exercise market power and raise prices for print retail advertising in the Lower Mainland. (Presumably, this framework relates to the issue of whether the merger is likely to lessen or prevent competition substantially as the Tribunal made no further reference to same.) The broader framework was found to embrace all dimensions of competition between the Pacific Dailies and the community newspapers and consists of two parts.
One part addressed the Director’s argument that the strength of the community newspapers could be attributed to the Pacific Dailies’ inability to compete more effectively and that the success of the community newspapers at the expense of the Pacific Dailies was proof that both were in the same product market. By acquiring the community newspapers, Southam was avoiding the need to compete more effectively (decision, at page 270). On this issue, the Tribunal concluded that the reasons underlying the present strength of the community newspapers was of secondary importance to the evidence that bore directly on whether the products of the respective newspapers are substitutes for one another (decision, at page 272).
The second part of the broad approach is directed at the two ways in which the Pacific Dailies and the community newspapers could conceivably compete for advertising dollars. One is through product modifications which make the respective newspapers more attractive to purchasers, the other is with respect to price.
Turning to product modifications in the context of the community newspapers, the Tribunal noted that one possibility was to increase the number of weekly editions thereby providing advertisers with a broader choice and thus matching more closely what the Pacific Dailies have to offer. The second product modification referred to by the Tribunal was the creation of community newspaper groups and the attempt to attract more advertising dollars through group buys. In response, the Tribunal concluded that the evidence failed to demonstrate that this product modification was successful in attracting advertisers of the Pacific Dailies to the community newspapers (decision, at page 273).
Turning to the product modifications introduced by the Pacific Dailies, the Tribunal acknowledged that Southam’s Flyer Force was in the same market as the community newspapers at the time of the acquisitions. By contrast, Southam’s introduction of the North Shore Extra was found not to be related to the main business of the Pacific Dailies and therefore the zoned supplement constituted a separate product (decision, at page 274). The Tribunal concluded that the introduction of a zoned supplement did not prove that the Pacific Dailies and community newspapers were in the same market (decision, at pages 274-275). (At page 278, the Tribunal held that with the introduction of the North Shore Extra, the Pacific Dailies and the community newspapers were in the same market with respect to display advertising on the North Shore.)
With respect to price competition, the Tribunal was not convinced that the community newspapers, either individually or through group discounts, geared their advertising rates to the Pacific Dailies. While acknowledging that Southam was concerned that if the Pacific Dailies’ advertising rates increased appreciably small advertisers would be forced to go to the community newspapers, the Tribunal deemed this weak evidence of price sensitivity because only the smaller advertisers would be so affected (decision, at page 275).
The Tribunal then referred to the evidence of Mr. Perks who had testified to the fact that the smaller advertisers had left the Vancouver Sun some time ago and that there was no chance they would shift their advertising back to that paper. After stating that this evidence was consistent with the conclusion that the business lost by the Pacific Dailies to the community newspapers was part of a “one-way flow” (decision, at page 275), the Tribunal posited that if “it was high rates that drove the smaller advertisers away, then lower rates could bring them back” (decision, at page 275). It is at this point in its reasons that the Tribunal began its extensive analysis relating to cross- elasticity.
The Tribunal stated the “key question” as follows (decision, at page 276):
The key question regarding the shift from the dailies to the community newspapers is whether this is the kind of substitution that occurs when a better product is introduced, or whether it reflects the weighing of combinations of characteristics of two products that are seen as offering very similar value per dollar. In the first scenario the superior product gradually replaces the existing product. While it may appear that the products are in the same market, they are not; customers are insensitive to prices and would not return to the old product in response to a small change in relative prices.
The above passage raises the central issue in terms of whether advertisers are insensitive to “small change[s] in relative prices” because they view advertising in the community newspapers as a superior product for which the Pacific Dailies are not a substitute. The Tribunal then outlined the Director’s position (decision, at page 276):
On the other hand, the Director’s allegations imply that a sufficiently large segment of users of community newspapers and dailies are sensitive to the relative cost of the two vehicles and would significantly change which vehicle they use in response to fairly small changes in price. Counsel for the Director argues that advertising decisions are complex and that advertisers have difficulty pinpointing the role of relative prices in their decisions. This is undoubtedly true. Price is just one of many variables that the advertisers have to take into account because advertising vehicles are highly differentiated products. Are the products in question here too highly differentiated for buyers to respond to small price changes? There are obvious differences and similarities between the dailies and the community newspapers. There is no reason to review them.
After stating that there are obvious differences between the Pacific Dailies and the community newspapers, the Tribunal concluded that the onus was on the Director to demonstrate that advertisers regard the two products as highly similar and that there is high demand elasticity. At pages 276-277, the critical issue was formulated as follows:
In light of the differences, it is incumbent on the Director to show that buyers regard the two products as highly similar and that small changes in relative price would cause a significant shift in advertising volume between the two vehicles. Evidence showing that advertisers use one or the other vehicle mainly because of the characteristics of the particular vehicle suggests the opposite. [Emphasis added.]
The last sentence in the above passage indicates that advertisers remain insensitive to price changes because of the advantages or disadvantages associated with advertising in one type of newspaper as opposed to the other. Continuing on at page 277, the Tribunal concluded:
There is in fact no evidence before the tribunal that advertisers are highly sensitive to the relative prices of the dailies and the community newspapers. With community newspapers throughout the Lower Mainland, with two and sometimes three editions per week, with apparently good overall quality including secure distribution, the community newspapers appear to have become the preferred vehicle for many advertisers that formerly relied solely on the dailies. The evidence is that the ability to obtain very high household penetration in the areas from which they draw customers is a major advantage that advertisers find in community newspapers. They are unlikely to be willing to give that up simply because the cost of advertising in the dailies goes down. With their present product configurations the dailies and community newspapers are at best weak substitutes for some advertisers. [Emphasis added.]
The Tribunal’s negative finding on price sensitivity was based, in part, on its finding that a “high” proportion of advertisers in the community newspapers are “not candidates for the dailies: their trade is too local.” As to “high reach” or “multi-outlet”, advertisers who use both the Pacific Dailies and the community newspapers there was some evidence of price sensitivity but no evidence that it was greater than among the small advertisers in the community newspapers. (Presumably, the Tribunal was referring to the two groups of advertisers discussed earlier in its reasons; see supra, at pages 19-20, and decision, at pages 189-190.] This conclusion is found at page 277:
A high proportion of advertisers in the community newspapers are not candidates for the dailies: their trade is too local. While there is some price sensitivity vis-à-vis dailies and community newspapers among multi-outlet or high reach advertisers, there is no evidence that it is greater than among the smaller advertisers in community newspapers vis-à-vis the alternatives that are open to them.
At page 278, the Tribunal reiterated its earlier conclusion that the evidence does not support the contention that “small changes in relative prices” would induce advertisers to shift from one type of newspaper to the other:
Thus, the evidence regarding the demand for newspaper advertising leads the tribunal to conclude that the community newspapers and the dailies are very weak substitutes: small changes in relative prices are not likely to induce a significant shift by advertisers from one type of newspaper to the other. Although community newspapers have over time succeeded in attracting business from the dailies, this has been caused more by changes in the conditions facing advertisers than by their responses to changes in price.
In reaching this conclusion the Tribunal did acknowledge that the Pacific Dailies and the community newspapers had been competing for advertisers through product modifications. In regard to Flyer Force and the North Shore Extra, the Pacific Dailies and the community newspapers were in the same product market with respect to display advertising. Nonetheless, the Pacific Dailies and the community newspapers were found to be too weak substitutes to be considered part of the same product market. At page 278, the Tribunal reasoned:
Examined solely as an unchanging product at a given point in time, the dailies and the community newspapers are too weak substitutes to be considered part of the same market. Yet, there is little doubt that they have been striving to attract many of the same advertisers. This competition has taken the form of modifications to their product offerings to take advantage of the changes in market conditions. With Flyer Force and the North Shore Extra, the Sun and the community newspapers were in the same market with respect to flyer delivery through much of the Lower Mainland and in the same market with respect to display advertising on the North Shore.
In passing, The Tribunal noted that advertising in the electronic media is too weak a substitute to be considered part of the relevant product market and that flyers delivered by reliable distributors are “clearly” in the same market. Finally, the Tribunal noted that the existence of community newspaper groups did not affect this conclusion as they had not had a significant impact on competition with the Pacific Dailies (decision, at pages 278-279).
8. Entry Into Community Newspaper Publishing (decision, at pages 279-285)
After deciding that retail print advertising services in the Pacific Dailies was not in the same product market as the community newspapers, the Tribunal went on to discuss at length certain conditions affecting entry into the community newspaper publishing business. The Tribunal commented that it was not difficult to enter this market, but that it was difficult to survive. In this regard, the Tribunal noted that the preferred method of entry was by acquisition, as evidenced by the actions of Southam. The Tribunal went on to hold that in order to make a finding that entry into the market is difficult, two factors would have to be addressed: “economies of scale” and “sunk costs”. Neither factor by itself was held to be a sufficient barrier to entry.
Economies of scale suggests, for example, that once a community newspaper acquires a lead in circulation and in size (e.g. North Shore News), it gains a decisive advantage over new entrants into the market. The term “sunk costs” signifies costs incurred in starting a business but which are not recoverable in the event that it fails. The Tribunal made no finding with respect to whether either of those conditions were satisfied. After discussing the evidence relating to the failure of the North Shore Today, a short-lived competitor of the North Shore News, the Tribunal concluded that new competitors could enter a market where an existing community newspaper was poor and entry was otherwise rewarding. At page 284, the Tribunal reasoned:
It is reasonable to conclude that there are a significant number of would-be entrants, such as Mr. Hopkins [editor of the short-lived North Shore Today], who would try to seize an opening created by a poor community newspaper in a community that had the potential to offer significant rewards.
9. Substantial Lessening/Prevention of Competition (decision, at pages 285-288)
After discussing the issue of market entry, the Tribunal went on to conclude that there was only a marginal likelihood that Southam’s acquisitions of the North Shore News and the Vancouver Courier would result in significantly higher advertising rates in the geographic markets alleged by the Director (decision, at page 285):
Since the dailies and community newspapers are weak substitutes the likelihood of the acquisitions resulting in significantly higher prices is very low. Moderate changes in relative prices are not likely to affect advertisers’ choices in a significant way. Thus, if the object of the acquisitions is to protect the dailies, this can only be done through fairly dramatic changes in the prices of the community newspapers, considered collectively. Southam would have to concentrate its price increases in the Courier and the North Shore News as all the other papers it owns face significant competition from a rival community newspaper. Advertisers would switch to the rival before considering the dailies. Raising prices would undoubtedly be costly to the Courier and the North Shore News but might be profitable to Southam as a whole if the dailies were able to maintain prices at a higher level than they otherwise could or, alternatively, to slow down the drift of advertisers to the community newspapers. Southam does not have the market power to follow this course.
The Tribunal then turned to two arguments advanced by the Director with respect to whether the merger was likely to prevent competition. With respect to the Director’s argument that the acquisitions frustrated the formation of an effective community newspaper group, the Tribunal noted that that argument could not succeed once it was found that the Pacific Dailies and community newspapers were not in the same product market. As to the Director’s allegation that Southam’s acquisitions prevented the possibility of another person acquiring one of the community newspapers for the purpose of launching a daily, the Tribunal rejected it on the basis that it was not likely such an event would occur (decision, at pages 287-288).
V — ISSUES/ANALYSIS
The Director submits that the Tribunal erred in concluding that the Pacific Dailies and community newspapers are not in the same product market. Specifically, it is argued that: (1) the Tribunal failed to properly apply its own stated approach to defining the relevant product market by requiring direct evidence of high price sensitivity on the part of advertisers; and (2) in concluding that a group of community newspapers would not be in the same product market as the Pacific Dailies, the Tribunal ignored relevant indirect evidence. Alternatively, the Director submits that the Tribunal erred in failing to consider whether, but for the acquisitions, the Pacific Dailies and community newspapers would have become close competitors for retail advertising services.
Southam’s position is relatively straightforward. The Tribunal did not err in its stated approach nor in its assessment of the evidence. As to the alternative ground of appeal, Southam maintains that the Director neither pleaded the issue nor raised it in argument before the Tribunal. In any event, Southam maintains that this Court lacks the jurisdiction to deal with the matter of market definition as it is a question of fact for which leave has not been sought as required by law. Southam also submits that the issues under appeal come within the Tribunal’s area of expertise and, for that reason, its decision is owed curial deference. I propose to deal initially with the latter two arguments advanced by Southam.
1. Market Definition—Question of Fact or Law?
If the issue of market definition is merely a question of fact then it necessarily follows that this Court lacks jurisdiction to hear this appeal. Subsection 13(2) of the Competition Tribunal Act dictates that an appeal on a question of fact cannot be brought without leave of this Court and no such leave has been sought by the Director. In my opinion, however, such leave was not required in this case.
The test or analytical framework that is to be adopted in determining whether the products offered by two merging firms are “close substitutes”, and therefore in the same product market, is a question of law. For example, as will be discussed more fully below, there are a number of tests or analytical frameworks that can be adopted for purposes of defining a relevant market. “Cross-elasticity” and “reasonable interchangeability of use” are two examples. The adoption of the appropriate framework and its proper application remain a question of law. Whether the facts in a particular case satisfy the requirements of any one framework is a question of fact or more precisely a question of mixed law and fact. Admittedly, the task of applying facts to a legal definition or framework is more often than not labelled a question of fact. This is so principally because the ultimate decision is one which requires the exercise of personal judgment on the part of the decision-maker, as is the case when arriving at primary determinations of fact.
I prefer to use the term mixed law and fact for two reasons. First, it avoids confusion in cases such as the one before us where jurisdiction is dependent on the type of question under review. Questions of fact, in my view, should be thought of in terms of primary facts to be established before the law can be applied, e.g. facts which are observed by witnesses and proved by testimony; see Moreno v. Canada (Minister of Employment and Immigration), [1994] 1 F.C. 298(C.A.), at pages 311-312. Whether these facts, once established, satisfy some legal definition or requirement is essentially a question of mixed law and fact. My second and principal reason for employing the term “mixed law and fact” is that it accords with subsection 12(1) of the Competition Tribunal Act. That subsection distinguishes between questions of law, questions of mixed law and fact, and questions of fact for jurisdictional purposes, a matter which will be dealt with more fully below under the topic of curial deference:
12. (1) In any proceedings before the Tribunal,
(a) questions of law shall be determined only by the judicial members sitting in those proceedings; and
(b) questions of fact or mixed law and fact shall be determined by all the members sitting in those proceedings. [Emphasis added.]
The confusion which exists over what is a question of law as opposed to a question of fact is further exacerbated in cases where the legal test ultimately selected is one which requires the decision-maker to engage in an analysis involving an assessment and weighing of factors intimately tied to the facts of the case. For example, in the present case, the Tribunal was obligated to turn from direct evidence of demand cross-elasticity to indirect evidence of substitutability as reflected in the “practical indicia” outlined in its decision: ex., physical characteristics of the products; uses to which products are put; behaviour and views of buyers, etc. Admittedly, such a legal framework gives the decision-maker a broad or flexible basis on which to formulate an opinion; so much so that it is analogous to cases where the decision-maker is called on to make primary determinations of fact. That approach to market definition does not, however, undermine the understanding that there are other appropriate evaluative frameworks and that the adoption of the correct legal framework for establishing substitutability remains a question of law. The argument of the Director is that the Tribunal erred when it expressly adopted one approach (practical indicia) but applied another (high demand cross-elasticity). But, as stated above, whether the test or analytical framework actually adopted or applied is the proper one remains a question of law.
It cannot be denied that there is dictum which holds that the task of delineating a relevant market is a question of fact. But, in my view, subject to the recent decision of this Court in Upper Lakes Group Inc. v. Canada (National Transportation Agency), [1995] 3 F.C. 395 there is nothing in the relevant case law which cannot be explained in the manner I have outlined.
The understanding that market definition is a question of fact can be traced to the decision of R. v. Hoffmann-La Roche Ltd. (Nos. 1 and 2) (1981), 33 O.R. (2d) 694, where the Ontario Court of Appeal considered paragraph 34(1)(c) of the former Combines Investigation Act [R.S.C. 1970, c. C-23], a criminal provision relating to predatory pricing. In that case, the appellant pharmaceutical company was giving a drug it sold, Valium, free to hospitals. Both the appellant and its competitor provided Valium to hospitals, retail pharmacies, physicians, clinics and government institutions, and it was argued that the market in which the firms competed consisted of all purchasers of Valium, not just hospitals. The Trial Judge [(1980), 28 O.R. (2d) 164 (H.C.)] held that the hospital market was the relevant market. Martin J.A., speaking for the Ontario Court of Appeal, agreed and further held, at page 706, that what constitutes a relevant market is a question of fact:
What constitutes a relevant market is essentially a question of fact depending on the circumstances underlying the particular offence alleged.
As support for this proposition, Martin J.A. cited The Queen v. J. W. Mills & Son Ltd. et al., [1968] 2 Ex. C.R. 275, at page 305; affd [1971] S.C.R. 63. In that case, paragraphs 32(1)(a) and (c) of the Combines Investigation Act [R.S.C. 1952, c. 314] were at issue regarding the charge of limiting or preventing competition. Gibson J. considered whether a relevant market had been established in the indictment. In the course of his judgment, he held that a relevant market “is a matter of judgment based upon the evidence” (at page 305). Gibson J., however, went on to provide a non-exhaustive list of factors relevant in defining a relevant market (see discussion, infra, at page 69 et seq.). In certain respects, this approach to market definition resembles that adopted by the Tribunal herein. But, as noted earlier, the “practical indicia” formulation is but one of several frameworks and its adoption remains a question of law as does the question of whether the Tribunal properly applied it.
There are at least two decisions which, in my view, strengthen the position that market definition is not a question of fact of the kind contemplated by subsection 13(2) of the Competition Tribunal Act. One is a decision of the Supreme Court of Canada, the other a decision of this Court. I turn first to the reasons of Gonthier J. in R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, which highlight the distinction between questions of law and questions of fact (or what the Competition Tribunal Act labels as mixed law and fact).
In Nova Scotia Pharmaceutical, the Supreme Court had to consider paragraph 32(1)(c) of the former Combines Investigation Act [R.S.C. 1970, c. C-23] dealing with conspiracies to prevent or lessen competition unduly. In the course of his judgment, Gonthier J. held at pages 646-647 that the meaning of the word “unduly” was a question of law which was reviewable by an appellate court:
While the word unduly is not defined by statute and defies precise measurement, it is a word of common usage which denotes to all of us in one way or another a sense of seriousness. Something affected unduly is not affected to a minimal degree but to a significant degree.
…
According to the appellants, since the determination of whether the restriction on competition was undue is a question of fact, not subject to appellate review, no conclusion can be drawn from the case law. This argument rests on a mistaken perception of the distinction between questions of fact and questions of law.
In the context of s. 32(1)(c), the process followed and the criteria used to arrive at a determination of “undueness” are questions of law and as such are reviewable by an appellate court. The application of this process and these criteria, that is the full inquiry, often involving complicated economic issues, into whether the impugned agreement was an undue restriction on competition, remains a question of fact. The general rule that appellate courts should be reluctant to venture into a re-examination of the factual conclusions of the trial judge applies with special force in a complex matter such as here. [Emphasis added.]
Gonthier J.’s judgment indicates that the process and criteria used by a lower tribunal to determine the legal meaning of statutory language is reviewable by an appellate court as a question of law. However, the application of that legal meaning to a particular case (i.e. the “full inquiry”) is a question of fact or, more precisely, a question of mixed law and fact. Against this background it is not difficult to reconcile Gibson J.’s understanding that a relevant market is a question of judgment based on the evidence, as per Gonthier J.’s reasoning in Nova Scotia Pharmaceutical.
A similar analysis can be applied easily to the reasoning of this Court in Tanguay v. Canada (Unemployment Insurance Commission) (1985), 10 C.C.E.L. 239 (F.C.A.), wherein Pratte J.A. stated, at page 242:
It is true that it is sometimes said that the question of whether an employee was justified in leaving his employment is one of fact. However, it is clear that where the question is as to the definition that must be given to the words “just cause” in s. 41(1), this is purely a question of law. It follows that if a decision is made which cannot be reconciled with this definition, the decision is vitiated by an error of law. (However, as the definition attributable to the words “just cause” in s. 41(1) is not so exact that it is always possible to say with certainty whether the employee has left his employment without just cause, cases may arise which may be decided one way or the other without doing injury to the legal concept of “just cause”. The question is then said to be one of fact: it would be more correct to say that it is a matter of opinion.) [Emphasis added.]
Finally, the notion that what constitutes a relevant market is a question of fact has been challenged by at least one commentator. Paul Crampton in Mergers and the Competition Act (Toronto, Carswell, 1990) recognizes that relevant market definition is a question of law and his extensive treatment of the issue should help lay to rest any doubt on this point (at page 261 et seq.). With respect to the legal significance of Hoffmann-La Roche and J. W. Mills, he concludes (at page 264, note 9):
It would appear from the context of the remarks in these cases that the learned judges meant that the question “what constitutes the relevant market in a given case” is a question of fact. The distinction is important, because the meaning of the notion “relevant market” does not change from one fact situation to another. [Emphasis added.]
I agree with this characterization but would reformulate it so that it reads “what constitutes the relevant market in a given case is a question of mixed law and fact”. This refinement of Crampton’s observation preserves the notion that the analytical framework for determining a relevant market does not change from one case to another and is consistent with section 12 of the Competition Tribunal Act.
In conclusion, I am of the view that the question of market definition is one of law and not fact and, therefore, this Court possesses the requisite jurisdiction to hear this appeal. As noted earlier, I am aware of the recent decision of this Court in Upper Lakes Group Inc. v. Canada (National Transportation Agency), supra, at page 40, where the majority in obiter adopts a contrary opinion. Our respectful differences of opinion on this issue are now a matter of public record.
2. The Standard of Appellate Review—Curial Deference
Southam relies on the jurisprudence of the Supreme Court of Canada in support of its argument that curial deference is owed to decisions of a specialized tribunal, such as the Competition Tribunal, on matters falling squarely within its expertise. Succinctly stated, “correctness” is not the appropriate standard of review in this case. This is so notwithstanding the fact that the Competition Tribunal Act contains no privative clause but rather a statutory right of appeal on questions of law and mixed law and fact. I think it important to note that, by implication, Southam’s argument forces us to consider Parliament’s intention with respect to the role of the Federal Court of Appeal and, ultimately, the Supreme Court of Canada in the development and application of competition law in Canada.
The respondents’ argument raises two distinct questions. First, are the decisions of the Tribunal involving questions of law, including that pertaining to market definition, owed curial deference? Second, assuming that deference is owed, what is the appropriate standard of review? I find it unnecessary to address the latter question for, in my opinion, the doctrine of curial deference is inapplicable to the case at bar. (As to the appropriate standard of review, see Gonthier J. in Bell Canada, supra, at page 1746, and Hugessen J.A. in Upper Lakes Group Inc. v. Canada (National Transportation Agency), supra, at page 434.)
The most recent pronouncement of the Supreme Court on the matter of curial deference in an appeal context is Pezim v. British Columbia (Superintendent of Brokers), supra, at page 10, wherein Iacobucci J. reviews the earlier jurisprudence commencing with the Supreme Court’s decision in Bell Canada v. Canada (Canadian Radio-television and Telecommunications Commission), supra, at page 10. In the latter case, the Supreme Court was faced with a statutory right of appeal from a decision of the CRTC. In a unanimous judgment, Gonthier J. states, at pages 1745-1746:
It is trite to say that the jurisdiction of a court on appeal is much broader than the jurisdiction of a court on judicial review. In principle, a court is entitled, on appeal, to disagree with the reasoning of the lower tribunal.
However, within the context of a statutory appeal from an administrative tribunal, additional consideration must be given to the principle of specialization of duties. Although an appeal tribunal has the right to disagree with the lower tribunal on issues which fall within the scope of the statutory appeal, curial deference should be given to the opinion of the lower tribunal on issues which fall squarely within its area of expertise.
While acknowledging that curial deference should be afforded the opinion of a lower tribunal on issues falling squarely within its area of expertise, the Supreme Court concluded that no deference was due in Bell Canada as the issue there involved an analysis of the procedural scheme created by the Railway Act [R.S.C., 1985, c. R-3] and the National Transportation Act [R.S.C., 1985, c. N-20]. Since the CRTC was not created for the purpose of interpreting either piece of legislation, the impugned decision was not within its expertise. Implicit in this finding is the understanding that curial deference would have been owed had the CRTC’s decision turned on the interpretation of a provision of its enabling statute.
It is settled that the concept of specialization of duties requires deference to decisions of tribunals on matters falling squarely within their expertise. This point was reaffirmed in United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316. Although Bradco was not a case involving a statutory right of appeal, the observations of Sopinka J., writing for the majority, were quoted with approval in Pezim. At page 335, Sopinka J. held:
… the expertise of the tribunal is of the utmost importance in determining the intention of the legislator with respect to the degree of deference to be shown to a tribunal’s decision in the absence of a full privative clause. Even where the tribunal’s enabling statute provides explicitly for appellate review, as was the case in Bell Canada, supra, it has been stressed that deference should be shown by the appellate tribunal to the opinions of the specialized lower tribunal on matters squarely within its jurisdiction.
On the other side of the coin, a lack of relative expertise on the part of the tribunal vis-à-vis the particular issue before it as compared with the reviewing court is a ground for a refusal of deference.
In Pezim, Iacobucci J. took the opportunity to consolidate the extant law in what he termed a “pragmatic or functional approach” to the concept of curial deference in an appellate context. That approach had its genesis in the reasons of Beetz J. in U.E.S., Local 298 v. Bibeault, [1988] 2 S.C.R. 1048, where at page 1088 he stated:
… the Court examines not only the wording of the enactment conferring jurisdiction on the administrative tribunal, but the purpose of the statute creating the tribunal, the reason for its existence, the area of expertise of its members and the nature of the problem before the tribunal.
In the present circumstances, the functional approach advocated in Pezim requires an analysis on three levels: (1) the purpose of the Act and the reasons for the Tribunal’s existence; (2) the statutory provisions conferring jurisdiction on the Tribunal and, in particular, the composition of the Tribunal and the decision-making power of its constituent members; and (3) the nature of the problem before the Tribunal.
(a) The Purpose of the Act
One of the principal purposes of the Act is to promote efficiency and adaptability in the Canadian economy. It also seeks to provide consumers with competitive prices and product choices. That the Act aims at the public interest in preventing anti- competitiveness is rendered clear in section 1.1 [as enacted by R.S.C., 1985 (2nd Supp.), c. 19, s. 19] of the Act which reads as follows:
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. [Emphasis added.]
In 1986, Parliament divided jurisdiction over this public interest concern into two substantive parts. Under the current scheme, the superior courts of criminal jurisdiction, as well as the Trial Division of the Federal Court of Canada, have jurisdiction over the criminal provisions under Part VI of the Act. Meanwhile, the Tribunal has exclusive jurisdiction over the civil aspects found in Part VIII of the Competition Act which deals with, inter alia, mergers. There can be no doubt that Parliament intended to establish a specialized Tribunal to deal with issues arising under Part VIII. That fact was noted by Gonthier J. in Chrysler Canada Ltd. v. Canada (Competition Tribunal), [1992] 2 S.C.R. 394, at page 406:
Section 8(1) CTA confirms the jurisdiction of the Tribunal over Part VIII. The civil part of the CA therefore falls entirely under the Tribunal’s jurisdiction. It is readily apparent from the CA and the CTA that Parliament created the Tribunal as a specialized body to deal solely and exclusively with Part VIII CA, since it involves complex issues of competition law, such as abuses of dominant position and mergers.
The Tribunal’s specialized role is reflected in its broad remedial powers under section 92 of the Act in respect of both proposed and completed mergers. Moreover, the Tribunal’s powers under Part VIII are more effective in enforcing Parliament’s concern for the long-term functioning of the free market than those under the criminal provisions, as noted by Gonthier J. in Chrysler, at page 407:
The same concern for the proper long-term functioning of the free market lay at the very heart of the enactment of Part VIII in 1986. Civil remedies can be more finely attuned and stand a better chance of leading to lasting compliance with the CA than criminal convictions.
Consequently, the Tribunal’s exclusive jurisdiction and broad powers in Part VIII are integral to the attainment of the objectives of the Competition Act and, in certain respects, more important than the criminal aspects of the Act. The broad powers of the Tribunal to act in the public interest suggest that curial deference is owed those decisions squarely within its expertise. Closer scrutiny of the scheme of the Act, however, is required before arriving at a final determination.
(b) Composition of Tribunal and Jurisdiction
Unlike any other federal tribunal, the Competition Tribunal is composed of both judicial and lay members. The relevant sections of the Competition Tribunal Act read as follows:
3. …
(2) The Tribunal shall consist of
(a) not more than four members to be appointed from among the judges of the Federal Court—Trial Division by the Governor in Council on the recommendation of the Minister of Justice; and
(b) not more than eight other members to be appointed by the Governor in Council on the recommendation of the Minister.
(3) The Governor in Council may establish an advisory council to advise the Minister with respect to appointments of lay members, which council is to be composed of not more than ten members who are knowledgeable in economics, industry, commerce or public affairs and may include, without restricting the generality of the foregoing, individuals chosen from business communities, the legal community, consumer groups and labour.
…
4. (1) The Governor in Council shall designate one of the judicial members to be Chairman of the Tribunal.
…
10. (1) Subject to section 11, every application to the Tribunal shall be heard before not less than three or more than five members sitting together, at least one of whom is a judicial member and at least one of whom is a lay member.
(2) The Chairman shall designate a judicial member to preside at any hearing or, if the Chairman is present at a hearing, may preside himself.
While the Tribunal is composed of four “judicial members” (judges of the Trial Division of the Federal Court) and eight “lay members”, the general practice is for the Tribunal to sit as a panel of three with the judicial member presiding, as required by subsection 10(2) of the Competition Tribunal Act. In theory, it is possible to have a panel of five composed of four judicial members and one lay member; see subsection 10(1). As to the expertise possessed by those appointed by the Governor in Council to the Tribunal, it is trite to note that the judicial members are not required by law to possess an expertise in competition law. (This is not to suggest that the judicial members do not bring to the Tribunal a legal expertise relevant to competition issues.) Similarly, its lay members come to the Tribunal with diverse backgrounds. Some might possess an expertise in economics. Others are drawn from the business community because of their practical understanding of markets. Some lay members may well be perceived as representing the interests of opposing groups, e.g. business and labour.
Judicial and lay members are appointed for a seven-year term. Currently, of the eight lay members only one is retained on a full-time basis. The remaining serve on a part-time basis as required. The judicial members are relieved of their Federal Court duties only to the extent that it is necessary to fulfil their duties as members of the Tribunal. To those familiar with federal regulatory agencies such as the CRTC and National Transportation Agency, the statutory differences between these tribunals and the one under consideration are very real.
Not only does the Competition Tribunal Act distinguish between judicial and lay members, it does so for the express purpose of assigning jurisdiction with respect to three types of legal questions. Section 12 of the Competition Tribunal Act signifies a clear intent on the part of Parliament to divest the Tribunal’s lay members of the jurisdiction to decide questions of law. The relevant provision reads as follows:
12. (1) In any proceedings before the Tribunal,
(a) questions of law shall be determined only by the judicial members sitting in those proceedings; and
(b) questions of fact or mixed law and fact shall be determined by all the members sitting in those proceedings.
(2) In any proceedings before the Tribunal,
(a) in the event of a difference of opinion among the members determining any question, the opinion of the majority shall prevail; and
(b) in the event of an equally divided opinion among the members determining any question, the presiding member may determine the question.
While argument might have been directed at whether the issue of market definition is within the specialized expertise of the Tribunal’s lay members, which in my opinion it is not, the fact remains that Parliament vested judicial members with sole responsibility for determining questions of law. Subsection 12(1) of the Competition Tribunal Act renders this patently clear while leaving questions of fact and questions of mixed law and fact to be decided by the members on a majority basis.
I hasten to add that the legislative history leading up to the passage of the Competition Act in 1986 reveals clearly that the Tribunal, as presently constituted with the jurisdiction of its respective members, reflects a compromise between those who sought to vest jurisdiction under Part VIII of the Act in a tribunal composed entirely of lay experts and those who sought to vest the courts with civil jurisdiction; see Bill C-256 [An Act to promote competition, to provide for the general regulation of trade and commerce, to promote honest and fair dealing, to establish a Competitive Practices Tribunal and the Office of Commissioner, to repeal the Combines Investigation Act and to make consequential amendments to the Bank Act] (June 1971), Bill C-42 [An Act to amend the Combines Investigation Act and to amend the Bank Act and other Acts in relation thereto or in consequence thereof] (March 1977), Bill C-13 [An Act to amend the Combines Investigation Act and to amend the Bank Act and other Acts in relation thereto or in consequence thereof] (November 1977) and compare with Bill C-29 [An Act to amend the Combines Investigation Act and the Bank Act and other Acts in consequence thereof] (April 1984). This compromise is reflected in the Competition Tribunal Act and, in my view, one which must be respected. I know of no other enabling legislation which goes so far as to prescribe in as much detail the respective roles of a tribunal’s constituent members.
As stated above, the definition of product market is a question of law and therefore the criteria or factors used to circumscribe that definition must be questions which, if necessary, go to the judicial member of the Tribunal for determination. Given this statutory imperative, it cannot be said that the problem at hand falls squarely within the Tribunal’s expertise. As a jurisdictional matter, Parliament has expressly decided otherwise. That much is evident from Parliament’s manifest intention to direct questions of law to the judicial member only, and who cannot be deemed to bring special expertise in competition law to the Tribunal. Hence, it follows that curial deference is not owed and that the standard of appellate review is correctness.
(c) Nature of the Problem
I have already determined, for jurisdictional purposes, that the adoption and application of a framework for market definition is a question of law. But there are also strong policy reasons why the issue of market definition should be subject to ordinary appellate review.
Market definition is a legal construct, not an economic one. It must be recognized that although the term “relevant market” is referred to in paragraph 93(g) [as am. idem, s. 45] of the Act, it remains undefined as is the case in comparable legislation found in other jurisdictions; e.g. section 7 of the Clayton Act, 15 U.S.C. 18 (1988). The omission is not an oversight on the part of Parliament but an implied recognition of the fact that the term is and always has been a judicial construct informed by economic principles and now guided by the practical experience of those familiar with the operation of markets—lay members of the Tribunal: see generally G. J. Werden, “The History of Antitrust Market Delineation” (1992), 76 Marq. L. Rev. 123; Note, “The Market: A Concept in Anti-Trust” (1954), 54 Colum. L. Rev. 580; and David Macdonald, “Product Competition in the Relevant Market Under the Sherman Act” (1954), 53 Mich. L. Rev. 69; see also United States v. Columbia Steel Co., 334 U.S. 495 (1948), at pages 508, 519, 520 and 527; Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953), at page 612, note 31.
It cannot be forgotten that market definition is vital to merger analysis and Parliament’s concern over the exercise of market power. A definition which is too narrow may well have the de facto effect of repealing the merger provisions of the Act. Once it is held that the products of two merging firms are not within the product market then the issue of whether the merger is likely to cause a substantial lessening of competition is simply rendered moot. Conversely, a definition which is too broad is just as apt to enjoin mergers which do not undermine the objectives of the Act.
In conclusion, I am of the view that no curial deference is owed decisions of the Tribunal involving market definition.
3. Market Definition—Background
For purposes of merger analysis, a relevant market has three dimensions: product, geographic and temporal. The parties are agreed as to the geographic dimension. As will become evident, the temporal aspect remains a theoretical concern. It is the concept of product market which has proven problematic. The Tribunal’s initial framework for assessing relevant product market was embodied in the concept of demand elasticity, but supposedly abandoned once it was recognized that “direct evidence” was unavailable and therefore the void would have to be filled by “indirect evidence” of substitutability.
Indirect evidence took the form of several factors or practical indicia which would be examined in arriving at a conclusion as to whether the Pacific Dailies and community newspapers are in the same product market with respect to retail print advertising services. The substance of the Director’s argument is that the Tribunal failed to weigh the evidence relating to each of the indicia identified, but rather based its decision on the Director’s failure to adduce statistical or anecdotal evidence as to whether “small changes in relative prices” would cause advertisers to move their retail print advertising from one newspaper to another. In adopting that approach the Tribunal, it is argued, ignored all other relevant evidence.
In alleging that the Tribunal failed to apply its stated approach to market definition, it has been presumed that that approach embodies the correct legal framework. It is my understanding that the parties had agreed on the analytical framework to be applied and that the Tribunal was prepared to evaluate the evidence and render a decision on the basis of that common understanding, as reflected in the practical indicia outlined by the Tribunal. The immediate problem is that the Tribunal’s reasons do not even reflect that underlying agreement.
During argument on appeal, counsel for the Director indicated that the origins of the market definition employed by the Tribunal could be found in the affidavit of Dr. Globerman, an economist who testified on behalf of Southam (Appeal Case, vol. 24, at page 9026). That affidavit refers sparingly to the Director’s 1992 Merger Enforcement Guidelines which set out “evaluative criteria” for assessing, inter alia, relevant product markets. Southam’s memorandum on appeal also cites those guidelines and, as well, the affidavit of Dr. Globerman in support of its position that the Tribunal adopted the correct “legal standard” and that that approach is consistent with the position both parties advanced before the Tribunal (see respondents’ memorandum of fact and law, paragraph 61).
In my view, the principal issue raised by the Director cannot be addressed properly without first attempting to explain the origins of the practical indicia approach to market definition and the relevance of the Director’s Guidelines. That such guidelines are binding on no one and are merely intended to explain the Government’s enforcement policy and the review function performed within the Bureau of Competition Policy is not questioned. What is of significance is the fact that the Director’s Guidelines build upon those promulgated by enforcement agencies in the United States. In turn, the American guidelines were drafted having regard to the extensive United States jurisprudence surrounding the interpretation of section 7 of the Clayton Act which proscribes mergers resulting in a substantial lessening of competition. However, the Director’s Guidelines are not even referred to in the Tribunal’s decision; on this point, see C. S. Goldman and J. D. Bodrug, “The Hillsdown and Southam Decisions: The First Round of Contested Mergers Under the Competition Act” (1993), 38 McGill L.J. 724, at page 751.
If we are to make any headway with respect to the issue of market definition in Canada then it is necessary to provide an analysis which discloses existing theoretical and legal frameworks. The ensuing analysis covers the following topics: (a) market power paradigms; (b) American jurisprudence; (c) Canadian jurisprudence; and (d) merger enforcement guidelines in both the United States and Canada. Following that analysis, I shall deal with the substantive error alleged by the Director.
(a) Market Power—The Paradigms
It is universally accepted that a merger must be examined in terms of its likely effect on competition within a relevant market. The central concern is with respect to exercise of market power by a single dominant firm or a group of firms acting collectively. In turn, market power is recognized as the ability to profitably raise prices above competitive levels without losing a significant portion of business to rival firms or firms that may become rivals as a result of the price increase: see decision, at page 177 quoting G. A. Hay, “Market Power in Antitrust” (1992), 60 Antitrust L.J. 807, at page 808; R. Pitofsky, “New Definitions of Relevant Market and the Assault on Antitrust” (1990), 90 Colum. L. Rev. 1805, at pages 1807-1808 (hereinafter “Pitofsky”); and ABA Antitrust Section, Monograph No. 12, Horizontal Mergers: Law and Policy (1986), at page 62 (hereinafter “Horizontal Mergers”).
Since it is not possible to measure market power directly, the analysis of whether a merger will give rise to market power focusses initially on determining the relevant market. Once the relevant market has been defined then it is necessary to infer market power within that market through the use of proxies such as market shares or concentration (subject to the limitations prescribed by subsection 92(2) and section 93 of the Act). With respect to product market definition, there are several paradigms used to explain how one goes about determining whether products are sufficiently close substitutes and therefore to be included in the same product market. Two are of particular relevance to the appeal at hand: the “hypothetical monopolist” and “cross-elasticity”. The latter is outlined in the Tribunal’s reasons while the former is embraced in the Director’s Guidelines.
Under the hypothetical monopolist paradigm one asks what would happen if a hypothetical monopolist seller of a group of products imposed a “significant and non-transitory price increase”. In the event a sufficient number of buyers were to shift to other products such that the monopolist would find the price increase unprofitable then that group of products is deemed too narrow to constitute a market. Accordingly, the market is expanded to embrace the next best substitute. The analysis is repeated until one is able to identify the smallest group of products for which the hypothetical monopolist could profitably impose a price increase. The geographic market is determined in an analogous manner; see generally Horizontal Mergers, at page 105; Crampton, at page 280; and Director’s Guidelines, at pages 7 and 9.
The cross-elasticity paradigm has both demand and supply dimensions. Demand elasticity refers to the effect which a change in the price of one product has on the demand of another. It measures the rate at which consumers increase or decrease their consumption of one product in response to the price change of another. Under this paradigm, if a change in the price of one product causes a significant change in the quantity demanded of another then the cross- elasticity of demand is said to be high and both products are treated as being in the same product market. Conversely, if a price change in one product causes little or no change in demand for the other product the cross-elasticity is said to be low and hence the products cannot be said to fall within the same product market. The process is repeated with respect to other products until the product dimensions of the market have been settled.
Supply elasticity focusses on the ability of existing companies to alter their production facilities to produce a product which competes with that produced by another hypothetical monopolist in response to a significant and non-transitory price increase imposed by the latter. The supply side of the equation is viewed as relevant because it is assumed that a monopolist contemplating a price increase will be constrained by the knowledge that others are capable of entering the market if it would be profitable to do so. Whether or not existing firms will enter a particular market and therefore be deemed part of the relevant market, is dependent on whether there are any barriers to entry.
In evaluating supply elasticity, consideration is given to examples of both successful and unsuccessful entry into a product market (see Crampton, at pages 293-294). It would appear that supply elasticity does not directly affect the question of whether one product is a substitute for another. Its primary purpose is to identify all of the firms that are within the relevant market. Consequently, this factor takes on greater significance when consideration is given to the matter of market shares or concentration (the more firms that comprise the market the less the market share) and whether the merger is likely to lessen competition substantially. I hasten to add that barriers to market entry may also be relevant in the context of whether the merger is likely to prevent competition in the sense that they act as deterrents with respect to potential competitors.
To the extent that either paradigm is seen as a practical tool in merger analysis, it remains necessary to establish in concrete terms what constitutes a “small but significant non-transitory increase in price”. Typically, the literature refers to a 5% increase in price sustained over a period of one year. Invariably, the 5% threshold can be adjusted, depending on the nature of the industry. The hypothesized price increase has significant policy implications by virtue of the fact that the percentage increase is directly related to the potential market power that is to be tolerated before merger enforcement is invoked. At the same time, it has been suggested that any threshold level is necessarily arbitrary and based on intuition; see Werden, “Market Delineation and the Justice Department’s Merger Guidelines”, [1983] Duke L.J. 514, at page 550; and Horizontal Mergers, at page 118, citing Elzinga & Hogarty, “The Problem of Geographic Market Delineation in Antimerger Suits” (1973), 18 Antitrust Bulletin 45, at page 74.
The hypothetical monopolist and cross-elasticity paradigms are the two theoretical frameworks most commonly employed to explain the concept of a relevant market. Armed with that understanding, the real issue is whether either paradigm is of any practical significance when it comes to the task of delineating the boundaries of a product market. The major criticism of the hypothetical monopolist paradigm is that it offers little guidance regarding its practical application; see Crampton, at page 282 and Horizontal Mergers, at page 109. The majority of criticisms, however, are reserved for the cross-elasticity paradigm. Crampton offers a convenient summary of existing criticisms (at pages 277-278):
As one commentator has observed, “(t)he difficulty of measuring demand elasticities has made it appear that it is hopeless to try to define economically meaningful industries.” This is so for many reasons. First, one must gather empirical data regarding the variation of quantities demanded or supplied as a result of changes in the price of other goods. This is extremely difficult in the best of circumstances. Second, these measures assume that the price of the good that is being examined, together with all other factors which are capable of influencing demand/supply for this good, remain constant. Third, apart from these practical difficulties that are associated with measuring cross-elasticities in the “real world”, “(t)here is no magic value of cross-elasticity measures which divides ‘close’ substitutes from ‘distant’ substitutes.” Indeed, the choice of where to locate the dividing line is completely arbitrary. In addition, since the monopolist cares only about the proportionate amount by which his sales decrease as price rises, particular cross-elasticities may provide a misleading indication of the ability of the market as a whole to constrain monopolistic behaviour. “Many very small cross-elasticities may do more to keep a monopolist from raising price than one large elasticity.” Finally, several weaknesses in the correspondence between cross elasticity and substitutability have been identified. For example, there are situations in which this correspondence is not one to one. Accordingly, although courts, commissions and/or administrative authorities in several countries have referred to the need to include in the same market products with high cross-elasticities of demand or supply, the difficulties that would be associated with employing cross-elasticity as a bona fide framework of analysis would be great.
The most obvious limitation on the applicability of either the hypothetical monopolist or cross-elasticity paradigm is the unavailability of direct (i.e. statistical) evidence. With respect to the latter paradigm, it is widely acknowledged that the statistical data necessary to compute cross-elasticity is rarely, if ever, available. Thus, it is not surprising that various frameworks or tests have evolved. It is in the American jurisprudence that one begins to appreciate why it is that the issue of market definition remains so problematic and controversial.
(b) American Jurisprudence
Merger analysis in the United States is a two-step process. The first is to define the relevant market. The second is to determine whether there has been a substantial lessening of competition as required by section 7 of the Clayton Act. With respect to the latter determination, the primary consideration is that of market share held by the merging firms. Thus, for those accused of antitrust behaviour the legal strategy is to convince the decision-maker that the products of the two merging firms are not close substitutes and therefore not in the same product market. Failing that argument, the merging firms will seek to have the market expanded to include as many products or firms as possible so as to diminish their market share. Government strategy is to argue the converse.
It is within the above context that one begins to appreciate the fundamental significance of the market definition issue in the United States and the ability of American courts to carve out narrow or broad markets depending on the definitional framework so adopted. I hasten to point out, however, that our Act differs from the Clayton Act in several material respects. Subsection 92(2) of our Act expressly prohibits a finding that a merger is likely to lessen competition “solely on the basis of evidence of concentration or market share.” Moreover, section 93 of the Act provides a non-exhaustive list of factors that must be considered by the Tribunal before arriving at its conclusion.
For purposes of this appeal, it is sufficient to canvass three of the seminal decisions of the United States Supreme Court. Together they reflect the general framework on which market analysis is undertaken in that country.
The first of the decisions is United States v. du Pont de Nemours & Co., 351 U.S. 377 (1956) (hereinafter “Cellophane”), where the Supreme Court articulated the product market tests of “cross- elasticity of demand” and “reasonable interchangeability of use”. Du Pont was charged with monopolizing the manufacture of cellophane in violation of section 2 of the Sherman Act. The Government argued that the relevant product market was limited to cellophane. Du Pont produced almost 75% of the cellophane sold in the United States, but less than 20% of all flexible packaging materials. Although there were findings that there were significant differences between cellophane and other flexible packaging materials in terms of physical characteristics and price levels, and that cellophane was the only packaging material suitable to the needs of certain users (e.g. cigarette manufacturers), a majority of the Supreme Court concluded that the proper market included all flexible packaging materials and thus the Government had failed to discharge the burden of proof in establishing a monopoly on the part of du Pont. In reaching this conclusion, the Court’s approach to market delineation embraced two tests: “reasonable interchangeability” and “cross- elasticity”. The Court explained (at pages 394-395, 400 and 404):
IV. The Relevant Market.—When a product is controlled by one interest, without substitutes available in the market, there is monopoly power. Because most products have possible substitutes, we cannot, as we said in Times-Picayune Co. v. United States, 345 U.S. 594, 612, give “that infinite range” to the definition of substitutes. Nor is it a proper interpretation of the Sherman Act to require that products be fungible to be considered in the relevant market.
…
What is called for is an appraisal of the “cross-elasticity” of demand in the trade. See Note, 54 Col. L. Rev. 580. The varying circumstances of each case determine the result. In considering what is the relevant market for determining the control of price and competition, no more definite rule can be declared than that commodities reasonably interchangeable by consumers for the same purposes make up that “part of the trade or commerce,” monopolization of which may be illegal. As respects flexible packaging materials, the market geographically is nationwide.
…
An element for consideration as to cross-elasticity of demand between products is the responsiveness of the sales of one product to price changes of the other. If a slight decrease in the price of cellophane causes a considerable number of customers of other flexible wrappings to switch to cellophane, it would be an indication that a high cross-elasticity of demand exists between them; that the products compete in the same market. The court below held that the “[g]reat sensitivity of customers in the flexible packaging markets to price or quality changes” prevented du Pont from possessing monopoly control over price. 118 F. Supp., at 207. The record sustains these findings. See references made by the trial court in Findings 123-149.
We conclude that cellophane’s interchangeability with the other materials mentioned suffices to make it a part of this flexible packaging material market.
…
The “market” which one must study to determine when a producer has monopoly power will vary with the part of commerce under consideration. The tests are constant. That market is composed of products that have reasonable interchangeability for the purposes for which they are produced—price, use and qualities considered. While the application of the tests remains uncertain, it seems to us that du Pont should not be found to monopolize cellophane when that product has the competition and interchangeability with other wrappings that this record shows. [Emphasis added.]
Cellophane is the only case that I am aware of where a finding of high demand elasticity was made on the basis of statistical market data. There are two other aspects of Cellophane which have attracted attention.
First, the reasoning of the majority is widely believed to be seriously flawed because of what is now termed the “Cellophane fallacy”. In reaching their decision, it is maintained that the majority ignored the fact that du Pont’s profits on cellophane were unusually high and therefore demand elasticity should not have been evaluated at the monopoly price. Critics contend that the reason why many consumers of cellophane may have been willing to switch to other products was that du Pont was already charging supra-competitive prices, thus extracting monopoly profits on its cellophane sale. However, it has been questioned whether merger analysis is susceptible to the so-called cellophane fallacy. Professor Posner (now Judge Posner) has argued:
The problem does not arise in a merger case, where the issue is not whether the current price exceeds the competition level but whether the merger might result in a further deterioration of competitive conditions. If there are good substitutes in consumption or production at the current price, it is a detail whether that price is competitive or monopolistic. [R. Posner, “Antitrust Law: An Economic Perspective”, 128-129 (1976), cited in Horizontal Mergers, at pp. 125-126.]
Thus, the true concern is with respect to the ability of the merging firms to impose further price increases upon their customers.
The one aspect of Cellophane which has attracted support is the majority’s refusal to carve out a separate market in cellophane simply because there were some classes of users for whom cellophane was a preferred product. As Pitofsky states, at page 1814:
As long as substantial classes of customers existed who were in a position to switch easily and promptly in response to price increases or decreases (“precarious users”), the ability of those users to switch protected the competitive interests of those with a strong preference for cellophane over any substitutes (“captive users”).
Six years after Cellophane, the Supreme Court rendered its decision in Brown Shoe Co. v. United States, 370 U.S. 294 (1962), which has been described as the Rosetta Stone of market definition. Brown Shoe was the first section 7 merger case under the Clayton Act to be decided by the Supreme Court. In that case, the issue was whether a merger of Brown Shoe and Kinney, two shoe manufacturers with retail outlets, would lessen competition substantially in the supply of retail shoes. In the end, the Supreme Court condemned the merger for both its horizontal and vertical impacts.
Noting that Congress had not adopted any particular test for measuring the relevant market, the Supreme Court cited with approval both the “cross-elasticity of demand” and the “reasonable interchangeability of use” tests articulated in Cellophane. The Court then immediately went on to hold that within a broad market there may exist well defined substitutes which, in themselves, constitute a product market for antitrust purposes. The seminal passage giving rise to the concept of a submarket within a market, determined by reference to a number of practical indicia, is found at page 325:
The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. However, within this broad market, well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes. United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586, 593-595. The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. Because 7 of the Clayton Act prohibits any merger which may substantially lessen competition “in any line of commerce” (emphasis supplied), it is necessary to examine the effects of a merger in each such economically significant submarket to determine if there is a reasonable probability that the merger will substantially lessen competition. If such a probability is found to exist, the merger is proscribed. [Emphasis added.]
In Brown Shoe, the Supreme Court upheld the District Court’s finding that there were three separate product markets: men’s, women’s and children’s shoes. Resorting to four of the seven practical indicia, the Supreme Court found that each of these product lines were: (1) recognized by the public; (2) manufactured in separate plants; (3) characterized by uses peculiar to themselves; and (4) directed toward a distinct set of customers. Although one of the practical indicia was distinct prices, the Supreme Court refused to sanction a further division of product lines based on price/quality differences as it would simply be “unrealistic” (at page 326). Brown Shoe had argued that men’s shoes priced over $9 did not compete with those selling below that price. The Court did, however, concede that price and quality differences may be important in determining the likely effect of a merger but felt that (at page 326):
… the boundaries of the relevant market must be drawn with sufficient breadth to include the competing products of each of the merging companies and to recognize competition where, in fact, competition exists.
The delineation of submarket boundaries by reference to practical indicia such as those articulated in Brown Shoe was not well received. The submarket concept has been levelled “an intellectual monstrosity” with little “economic justification”; see Werden, supra, at page 160. On a more charitable tone, one commentator notes that the indicia list “is presented without any indication of priority or weight to specific factors and it unquestionably has worked a good deal of mischief in relevant market definition in merger cases”; Pitofsky, at page 1815. Nonetheless, the submarket concept has been used as a mechanism for excluding reasonably interchangeable products from a relevant market. Typically, reliance is placed on some but not all of the practical indicia; see Horizontal Mergers, at page 76.
Apparently in the two decades following the Supreme Court’s decision in Brown Shoe, the submarket concept and the practical indicia dominated thinking on market delineation in the lower courts; see Werden, supra, at page 172. In particular, government agencies employed the indicia to narrow the market and facilitate a finding that a merger was unlawful. However, reasonable interchangeability of use remains as an independent framework for market delineation in light of the decision in United States v. Continental Can. Co., 378 U.S. 441 (1964).
In Continental Can., the Government challenged the acquisition by Continental Can, the second largest producer of metal containers in the United States, of Hazel-Atlas Glass Co., the third largest producer of glass containers in that country. Although the District Court had found that there was competition among metal, glass and plastic containers with respect to end uses, it held that it was not the type of competition contemplated by the Clayton Act. The Supreme Court disagreed and concluded that the product market consisted of metal and glass containers even though end use competition also included manufacturers of plastic and paper containers. This particular aspect of Continental Can. produced strident criticism, including the accusation that:
… the Court appears to have taken a result-oriented approach to definition of the market gerrymandering the boundaries “so as to maximize the prospect of invalidating the challenged acquisition.” Note: “The Supreme Court, 1963 Term” (1964), 78 Harv. L. Rev. 143, at pp. 274-275.
Leaving aside this flawed aspect of the Supreme Court’s reasoning, Continental Can. stands for the proposition that a finding of significant end use or inter-industry competition can overcome evidence of price differentials and low price sensitivity. Such facts, while relevant, are not determinative of the product market issue. At pages 453-456, the Court reasoned:
Interchangeability of use and cross-elasticity of demand are not to be used to obscure competition but to “recognize competition where, in fact, competition exists.” Brown Shoe Co. v. United States, 370 U.S., at 326. In our view there is and has been a rather general confrontation between metal and glass containers and competition between them for the same end uses which is insistent, continuous, effective and quantitywise very substantial. Metal has replaced glass and glass has replaced metal as the leading container for some important uses; both are used for other purposes; each is trying to expand its share of the market at the expense of the other; and each is attempting to preempt for itself every use for which its product is physically suitable, even though some such uses have traditionally been regarded as the exclusive domain of the competing industry. In differing degrees for different end uses manufacturers in each industry take into consideration the price of the containers of the opposing industry in formulating their own pricing policy. Thus, though the interchangeability of use may not be so complete and the cross-elasticity of demand not so immediate as in the case of most intraindustry mergers, there is over the long run the kind of customer response to innovation and other competitive stimuli that brings the competition between these two industries within 7’s competition-preserving proscriptions.
Moreover, price is only one factor in a user’s choice between one container or the other. That there are price differentials between the two products or that the demand for one is not particularly or immediately responsive to changes in the price of the other are relevant matters but not determinative of the product market issue. Whether a packager will use glass or cans may depend not only on the price of the package but also upon other equally important considerations. The consumer, for example, may begin to prefer one type of container over the other and the manufacturer of baby food cans may therefore find that his problem is the housewife rather than the packer or the price of his cans. This may not be price competition but it is nevertheless meaningful competition between interchangeable containers.
Reasonable interchangeability of use (functional interchangeability) emphasizes two factors: the product’s uses and its physical characteristics. While demand cross-elasticity focusses on the sensitivity of buyers of one product to changes in the price of another, reasonable interchangeability focusses initially on the extent to which different products have similar qualities that allow them to be used for the same end use.
In determining whether products are substitutes for one another, the qualities of the products are not to be viewed in the abstract. Products which seem similar may be found not to be substitutes while products that appear very different may serve the same end use and be considered in the same product market. At the same time, the fact that two products are found to be functionally interchangeable does not necessarily lead to a finding that they are in the same product market. If buyers do not regard the products as substitutes for each other if only to a marginal degree then a broad market definition may be rejected on the basis that effective end use competition does not exist; see generally Kalinowski, Sullivan and McGuirl, Antitrust Laws and Trade Regulation, Vol. 3 (1995), at § 18.02 et seq.
The American jurisprudence with respect to the proper application of the interchangeability of use test reveals that where the intended use of the product is the same, products have been placed in the same market notwithstanding the following factors: different price levels, different physical characteristics in composition, appearance or quality, different customer classes or customer preferences and dissimilar production facilities or marketing and distribution methods; see Horizontal Mergers, at page 73, and cases collected at note 359.
(c) Canadian Jurisprudence
The issue of market definition in Canadian jurisprudence has not received the extensive treatment that it has in the United States. Before 1986, Canadian competition law, and merger law in particular, was largely based on the criminal provisions of the former Combines Investigation Act. Consequently, the issue of market definition was never pursued in terms of the economic and social policies generally associated with a civil scheme of regulating anti-competitiveness. Thus, the old criminal cases dealing with market definition are of little assistance in fashioning a modern product market definition under Part VIII of the Act. Since the new Act came into force, the Tribunal has had to deal with market definition in only two cases. Regrettably, as discussed below, neither of those cases is of assistance in resolving the issue under appeal.
Four of the old criminal cases which touch on market definition are noteworthy as they demonstrate that market definition was not a well-developed concept in Canadian law. All of these cases, however, do focus on the central concept of product market definition—substitutability. Yet, none offer a framework for determining how substitutability is to be assessed.
In R. v. Hoffmann-La Roche Ltd., noted earlier, the defendant, who was accused of predatory pricing by distributing the drug Valium to hospitals free of charge, argued that the market in which the firms competed consisted of all purchasers of their product (ex. pharmacies, physicians) and not just hospitals. The Trial Judge held that the hospital market was the relevant market. On appeal, it was alleged that the Trial Judge had failed to recognize the availability of substitute products when circumscribing the relevant market. The argument was rejected on the ground that substitutability was an irrelevant factor in view of the fact that the accused had provided Valium free to hospitals for the purpose of eliminating a competitor.
In The Queen v. Canadian Coat and Apron Supply Ltd. et al., [1967] 2 Ex. C.R. 53, the accused, who were in the business of supplying “linen towels” and controlled 85% to 90% of the market, were charged under subsection 32(1) of the Combines Investigation Act [R.S.C. 1952, c. 314] for conspiring to fix prices. They argued unsuccessfully that the product market should be expanded to include paper towels and other substitute products. The argument was rejected on the basis of customer preference for linen towels. At page 82 Gibson J. concluded:
… that the market was the section of the public on the Island of Montreal that needed and wanted not paper towels, or other substitute products, but cleaned, ironed, pressed, ready to use linen towels … and for whom paper towels and other substitute products were not satisfactory products;
In R. v. Canadian General Electric Company Ltd. et al. (1976), 15 O.R. (2d) 360 (H.C.), the three largest manufacturers of “large lamps”, controlling 95% of the Canadian market, were found guilty of conspiracy to lessen competition in the market contrary to paragraph 32(1)(c) of the Combines Investigation Act, R.S.C. 1970, c. C-23. This case is of particular interest because it implicitly adopts the submarket analysis articulated in Brown Shoe. The Court found that large lamps, a class of light bulbs, were the relevant market based largely on industry perception and functional interchangeability (at page 372):
Large lamps were treated by each of the accused as a distinct segment of the industry for the purposes of manufacture and sale. They constituted a significant portion of the sales of all lamps in Canada during the period in question. Looked at from any angle, the manufacture or sale of large lamps may be said to constitute a class or species of business in itself.
Large lamps are basically homogeneous products. There was little product differentiation among the large lamps of the three defendants. The public purchasing large lamps would be faced with comparable lines from each of the accused with the same physical characteristics and designed for the same use. The degree of substitutability or cross-elasticity is, for all practical purposes, non-existent.
The distribution of large lamps may therefore be considered a relevant market for the purpose of s. 32(1)(c) of the Act. It is a special class of business and is a distinguishable range of lamps within the total variety of lamps produced. The market has not been artificially created to suit the purposes of the present charges but flows from the nature of the product, its lack of cross-elasticity or substitutability with other products, and the treatment given the product through a special mode of distribution and a distinctive sales policy.
Perhaps the most significant case on market definition is the decision of Gibson J. in The Queen v. J. W. Mills & Son Ltd., supra. That case turned on paragraphs 32(1)(a) and (c) of the Combines Investigation Act, R.S.C. 1952, c. 314, involving conspiracies to prevent or lessen competition. The accused were in the “import pool” business. They shipped goods that arrived in Vancouver from the Orient by ship to other points in Canada by use of a special category of railway car called “Pool cars”. The accused argued, inter alia, that the Crown had not proved beyond a reasonable doubt the relevant market which they maintained should be expanded to include other competitors such as the railways and truckers. Gibson J. concluded otherwise after setting out a comprehensive list of market assessment factors. His analysis at pages 305-307 is worthy of replication:
Defining the relevant market in any particular case, therefore, requires a balanced consideration of a number of characteristics or dimensions to meet the analytical needs of the specific matter under consideration.
At one extremity, an ill-defined description of competition is that every service, article, or commodity, which competes for the consumer’s dollar is in competition with every other service, article, or commodity.
At the other extremity, is the narrower scope definition, which confines the market to services, articles, or commodities which have uniform quality and service.
In analyzing any individual case these extremes should be avoided and instead there should be weighed the various factors that determine the degrees of competition and the dimensions or boundaries of the competitive situation. For this purpose the dimensions or boundaries of a relevant market must be determined having in mind the purpose for what it is intended. For example, two products may be in the same market in one case and not in another.
And many characteristics or dimensions may be considered in defining the relevant market. All are not of the same order. And, in any particular case, usually, not all of the many characteristics or dimensions will have to be considered. In some instances, the definition may turn on only one characteristic or dimension or two (see again cases in Schedule “B”). However, in order to make a correct choice of the appropriate characteristics or dimensions, it may be necessary to review several types before selecting the proper one or ones.
Hereunder are noted some pertinent characteristics or dimensions that may be considered in defining a relevant market, but this list is not exhaustive. The classification also may be arranged in various ways.
(a) Product substitutability.
(The term economists use for this is “cross-elasticity of demand”. The terms “substitutability” and “cross-elasticity” are synonymous. As an example, the demands for two products have a high cross-elasticity if a change in the price of one results in a large measure, in purchasers substituting it for the other. How to measure the degree of cross-elasticity in any given case is usually difficult.)
(b) Actual and potential competition.
(The problem sometimes in competition analysis is whether to confine the “relevant market” to existing competition or to consider potential (sometimes called “poised”) competition as well).
(c) Geographical area.
(The geographical dimensions of a market are frequently an important factor in competitive analysis—e.g., should the relevant market be analyzed on a national basis, a regional or local area).
(d) Physical characteristics of products or service.
(Selecting products that have the same physical characteristics, or services that have the same features, is the simplest basis for defining a relevant market. But in some cases, for example, it may be correct legally to consider products with fairly dissimilar physical characteristics or services with somewhat dissimilar elements, as in the same market).
(e) End uses of products.
(The factor of end uses is closely related to physical characteristics in defining the relevant market. For example, if a product has different end uses in the hands of buyers, the definition of the relevant market may not be based solely on physical specifications. Also, for example, consideration of differences in uses is particularly important in studying markets for services).
(f) Relative prices of goods or services.
(The prices of goods or services may define the relevant market).
(g) Integration and stages of manufacture.
(Because of differences between the activities of competitors, problems of integration arise. In determining the relevant market, the problem is what products at what stage of manufacture to include or exclude).
(h) Methods of production or origin.
(Methods of production and the product resulting, and origin of material, as e.g., whether or not imported, are often important factors to consider in defining the relevant market).
The foregoing list is, of course, a rudimentary guideline representing a compendium of relevant market concepts prevalent at the time the case was decided (1968). Gibson J. made no further attempt to address any of the practical indicia. His final reasoning and conclusion on product market focussed on lack of substitutability (at page 314):
In my view, firstly, there were no substitute services for this service business in which the accused operated, that is to say, the facilities solely by ship and solely by air and the transportation business in connection therewith in relation to articles and commodities transported from the said designated area of the Orient to Toronto and Montreal were and are in another market and not the market in which these accused carried on their businesses.
The only significant treatment of market definition under the Competition Act is found in the decisions of the Tribunal in Canada (Director of Investigation and Research) v. Hillsdown Holdings (Canada) Ltd. (1992), 41 C.P.R. (3d) 289, and, to a lesser extent, in Canada (Director of Investigation and Research) v. Chrysler Canada Ltd. (1989), 27 C.P.R. (3d) 1. I shall deal with the latter case first.
In Chrysler Canada Ltd., the Director sought an order under section 75 of the Act requiring the respondent to accept the complainant as a customer. The complainant carried on the business of exporting parts for Chrysler automobiles to markets outside of North America. One of the issues before the Tribunal was whether the product market consisted of Chrysler auto parts sold in Canada, Chrysler parts sold in the United States or auto parts in general. In defining the terms “product” and “market”, the Tribunal specifically noted that the approach to market definition under section 75 was not to be equated with that involving mergers where the ultimate test is whether there will be a substantial lessening of competition. In cases involving paragraph 75(1)(a), the ultimate test concerned the effect on the business of the person who is denied supplies. The Tribunal concluded that as the complainant’s customers specified genuine Chrysler parts and would not accept substitutes, the product in question was Chrysler auto parts. Moreover, since the price paid for Chrysler parts sold in Canada was lower than that paid in the United States, the product was defined as Chrysler auto parts sold in Canada.
Hillsdown is the only other decision of the Tribunal which touches on the issue of market definition. In that case, the Tribunal considered the merger of the two largest meat rendering companies in Southern Ontario. The Tribunal had little difficulty in accepting the Director’s argument that the product market was the provision of rendering services for certain red meat materials. Such services involve the collection of left-over parts of livestock which are unsuitable for human consumption but which can be processed into tallow and protein meal. The Tribunal’s approach to market definition is brief (at page 299):
In determining the product dimensions of the market, the first step is to identify the product or products with respect to which, prior to the merger, the two firms were competitors. The second step is to ask whether there are any close substitutes to that product to which consumers could easily switch if prices were raised (an indication of demand elasticity). If two products appear to be close substitutes when both are sold at marginal cost, then the two should be included in the same product market. [Emphasis added.]
In Hillsdown, the Tribunal appeared to assume that the merging firms were, prior to the merger, competitors with respect to rendering services, thereby eliminating the first step in the analysis. In fact, the merging firms carried out the same rendering business, with the exception that one dealt with both red meat and poultry, and the other only with red meat. But it is apparent that the Tribunal was not concerned with whether the services actually offered by the firms were close substitutes having regard to such factors as price and quality. Its analysis focussed on the geographic dimension of the product market. Strictly speaking, however, if the reasoning in Hillsdown were applied to the case at bar, the Director’s appeal would have to be allowed as both the Pacific Dailies and the community newspapers offer the same service — retail print advertising.
To date, the Tribunal has not been asked to articulate any framework under the “first step”, to determine whether the products of two merging firms are in the same market. That, of course, is the very issue before us. I turn first, however, to the matter of merger enforcement guidelines which were to have informed the Tribunal’s approach to market definition.
(d) Merger Enforcement Guidelines
The first American guidelines were issued in 1968 and attempted to enunciate principles for market delineation in light of the Supreme Court jurisprudence at that time. These guidelines rejected the submarket concept articulated in Brown Shoe, but failed to take account of supply elasticity considerations. In 1982, and again in 1984, new guidelines were issued. These guidelines attempted to offer a complete analytical framework which could be used to identify those mergers that would create or enhance market power. The guidelines’ threshold for significant market power is phrased in terms of the magnitude of the price increase that would be imposed by a hypothetical monopolist. Despite the attempt to avoid the practical indicia approach to market definition, the guidelines ultimately offered a non-exhaustive list of factors relevant to the task of market delineation. In 1982, they read as follows:
(1) Evidence of buyers’ perceptions that the products are or are not substitutes, particularly if those buyers have shifted purchases between the products in response to changes in relative price or other competitive variables;
(2) Similarities or differences between the products in customary usage, design, physical composition and other technical characteristics;
(3) Similarities or differences in the price movements of the products over a period of years; and
(4) Evidence of sellers’ perceptions that the products are or are not substitutes, particularly if business decisions have been based on those perceptions.
The 1984 American guidelines contain no material changes. However, the issuance of new guidelines in 1992 has proved controversial because of an apparent shift in approach to market delineation and one which arguably reflects a more non-interventionist approach on the part of American enforcement agencies; see J. Simons and M. Williams, “The Renaissance of Market Definition” (1993), 38 Antitrust Bull. 799, and G. J. Werden, “Market Delineation Under the Merger Guidelines: A Tenth Anniversary Retrospective” (1993), Antitrust Bull. 517. It is unnecessary to become embroiled in that debate and thus I turn to the Canadian guidelines.
In 1992, the Director issued the first Canadian Merger Guidelines for the purpose of promoting a better understanding of merger enforcement policy and to provide a unifying framework for evaluating the likely impact of mergers on competition in Canada. They also serve the stated purpose of articulating to the business and legal communities the approach used by the Bureau of Competition Policy in reviewing merger transactions. In certain respects, the Director’s Guidelines build upon those issued in 1982 and 1984 in the United States. The hypothetical monopolist paradigm is expressly adopted. Thus, the critical concern is with respect to the ability of the merging firms to exercise market power by profitably raising prices.
The Director’s Guidelines acknowledge that direct evidence in the form of statistical measures of cross-elasticities is rarely available and thus consideration must be given to nine evaluative criteria which provide indirect evidence of substitutability: (1) views, strategies, behaviour and identifying of buyers; (2) trade views, strategies and behaviour; (3) end use; (4) physical and technical characteristics; (5) buyers’ switching costs; (6) price relationships and relative price levels; (7) cross-elasticity of supply considerations; (8) supply elasticity considerations; and (9) existence of second hand, reconditioned or leased products. Admittedly, there are similarities between the practical indicia referred to in Brown Shoe and those listed above. But any comparison must end here.
The Director’s Guidelines are intended to provide a rational framework for delineating market boundaries. The central issue is framed in terms of the hypothetical monopolist paradigm and hence the ability of the merging firms to impose profitable price increases. Apparently, the value of the paradigm does not lie in its practical application. Its true function is to ensure that the task of market delineation does not lose sight of the principal concern—the ability of the merging firms to profitably impose price increases.
Unlike the practical indicia found in Brown Shoe, or the decision under appeal, the Director’s Guidelines elaborate on each of the indicia and their relevance. Specifically, they reject the submarket concept as an independent framework of analysis, while recognizing that there is no one simple approach to market definition. The Director’s Guidelines also accept functional interchangeability as a criterion for determining relevant product market. It is generally a necessary, but not sufficient, condition to be met before two products will be placed in the same market. Likewise, while direct evidence of cross-elasticity or price sensitivity of buyers remains a relevant consideration, the Director’s Guidelines do not make it a necessary condition to a finding that two products are in the same product market.
It is instructive to reproduce those portions of the Director’s Guidelines which were to have informed the Tribunal’s reasoning but which remain non- binding on this Court:
3.2 THE PRODUCT DIMENSION
3.2.1 GENERAL APPROACH
The following approach to relevant market analysis is applied separately to each of the products in relation to which the merging parties appear to compete or are likely to compete. The analysis of the product scope of specific relevant markets commences by focussing upon what would happen if one of the merging parties attempted to impose a significant and nontransitory price increase in relation to the product. If the price increase would likely cause buyers to switch their purchases to other products in sufficient quantity to render the price increase unprofitable, the product that is the next best substitute will be added to the relevant market. The Bureau will then ask what would happen if the seller of this product and the merging party in question, acting as a hypothetical monopolist, attempted to impose a significant and nontransitory price increase with respect to the two products in the group. The process of adding the product that is the next best substitute for the products already included within the market continues until it would be possible for the sellers of these products, acting as a hypothetical monopolist, to profitably impose and sustain a significant price increase for a nontransitory period of time.
3.2.2 EVALUATIVE CRITERIA
In assessing the nature and magnitude of likely supply and demand responses to a future price increase in the context of particular cases, all relevant information is considered. However, particular weight is given to the factors highlighted below, which provide indirect evidence of substitutability. Direct evidence, in the form of statistical measures of cross-elasticities of demand and supply, is rarely available. In some situations, the results of the analysis of each of these factors are not consistent with a single conclusion. When this occurs, an attempt is made to arrive at the market definition that is most supportable by the available information.
3.2.2.1 Views, Strategies, Behaviour and Identity of Buyers—The views, strategies and behaviour of buyers are often among the most important sources of information considered in the assessment of whether buyers will likely switch to another product in the event of the postulated significant and nontransitory price increase. What buyers state they are likely to do, what they have done in the past, and their strategic business plans, often provide a reliable indication of whether the postulated price increase is likely to be imposed and sustained. Where buyers have not substituted product B for product A in the past, and indicate that they would not likely do so in the event of the price increase, it may be inappropriate to conclude, on the basis of hypothetical considerations, that these products compete in the same relevant market. The same can be true where two products are sold to buyers that have distinct characteristics, e.g., where product A is sold to consumers and product B is sold to businesses.
3.2.2.2 Trade Views, Strategies and Behaviour—Helpful information regarding historical and likely future developments in the relevant market is often provided by third parties knowledgeable about the industry, such as persons who supply the sellers of the relevant product. Similarly, industry surveys often provide data that assists the analysis. Another source of useful information is the past behaviour of the merging parties, or others who sell the relevant product, in relation to other products that are alleged to provide a significant constraining influence. For example, modifications to product design or packaging that follow similar developments made to a second product may suggest that the two products are in the same relevant market.
3.2.2.3 End Use—The extent to which two products are functionally interchangeable in end use is an important source of information regarding whether substitution between them is likely to occur. Indeed, functional interchangeability is generally a necessary, but not a sufficient, condition that must be met for two products to warrant inclusion in the same relevant market. Products that are purchased for similar end uses may be in the same relevant market notwithstanding the fact that they have very different physical characteristics, e.g., matches and disposable lighters.
Two products are more likely to be found to be in separate relevant markets as the difference between their prices increases or as their individual end uses are, or are perceived to be, more unique. For example, premium products such as gold plated lighters, luxury cars and writing instruments may be found to be in separate relevant markets from discount lighters, compact cars and disposable pens, respectively, notwithstanding that the premium and discount products have similar end uses.
3.2.2.4 Physical and Technical Characteristics—Although two products with unique physical or technical characteristics may be found to be in the same relevant market on the basis of functional interchangeability, such products are often found to be in separate relevant markets. In general, the greater is the value that buyers place on the actual or perceived unique physical or technical characteristics of a product, the more likely it is that the product will be found to be in a distinct relevant market. Product warranties, post-sales service, order turn-around time, etc., are all included in the bundle of characteristics that make up a product.
Against this background, we are now in a position to deal with the substantive issue raised on appeal.
4. The Alleged Error
The Director has framed the principal issue in terms of whether the Tribunal erred in its application of the stated approach to product market definition by requiring statistical or anecdotal evidence of price sensitivity on the part of advertisers to the exclusion of other evidence of substitutability. In order to analyze that alleged error, it is necessary to elaborate on the distinction between direct and indirect evidence of substitutability.
Products can be said to be in the same market if they are close substitutes. In turn, products are close substitutes if buyers are willing to switch from one product to another in response to a relative change in price, i.e. if there is buyer price sensitivity. Direct evidence of substitutability includes both statistical evidence of buyer price sensitivity and anecdotal evidence,[i] such as the testimony of buyers on past or hypothetical responses to price changes. However, since direct evidence may be difficult to obtain, it is also possible to measure substitutability and thereby infer price sensitivity through indirect means. Such indirect evidence focusses on certain practical indicia, such as functional interchangeability and industry views/behaviour, to show that products are close substitutes.
To the extent that it is possible to adduce statistical evidence of high demand elasticity, such evidence is virtually conclusive that two products are in the same product market. Evidence of price sensitivity can also come in anecdotal form which is a less conclusive, although still a persuasive factor tending to show that products are close substitutes. The fact that there is no direct evidence of substitutability, i.e. no statistical or anecdotal evidence of price sensitivity, does not show conclusively that products are not close substitutes. Put another way, evidence of price sensitivity is not a condition precedent for finding that two products are in the same product market. On this point, the decision in Continental Can. is instructive. There, there was vigourous competition between the metal and glass industries for the business of various manufacturers. The evidence, however, disclosed a low demand elasticity. Nonetheless, the United States Supreme Court was prepared to conclude that the two products were in the same product market because of inter-industry competition. It must be recognized that there are simply too many factors other than price which can affect a buyer’s choice and which can explain a low demand elasticity at any one point in time. As the Tribunal stated at page 276: “advertising decisions are complex and … advertisers have difficulty in pinpointing the role of relative prices in their decisions.” I turn now to the substance of the Director’s argument.
The Director’s argument that the Tribunal erred by requiring direct evidence of substitutability rests initially on a passage found at pages 276-277 of the decision:
There are obvious differences and similarities between the dailies and the community newspapers. There is no reason to review them. In light of the differences, it is incumbent on the Director to show that buyers regard the two products as highly similar and that small changes in relative price would cause a significant shift in advertising volume between the two vehicles. Evidence showing that advertisers use one or the other vehicle mainly because of the characteristics of the particular vehicle suggests the opposite.
There is in fact no evidence before the tribunal that advertisers are highly sensitive to the relative prices of the dailies and the community newspapers. [Emphasis added.]
The Director maintains that the reference to “no evidence” in the last sentence quoted means direct evidence and therefore the Tribunal failed to consider the indirect evidence embraced by the practical indicia. Southam responds by noting that there is no express reference in the above quote to direct evidence, nor anything in the reasons of the Tribunal which would lead one to conclude that the Tribunal considered the absence of buyers’ behavioural evidence of price sensitivity as decisive. Southam insists that the success of this appeal cannot hinge on an isolated passage from a decision totalling more than 300 pages in length. Reading the Tribunal’s decision as a whole, Southam maintains that it is clear that the Tribunal reached its conclusion with respect to market definition only after carefully weighing all evidence, be it direct or indirect. I do not agree.
For the reasons below, I find that the Tribunal erred by requiring statistical or anecdotal evidence of high price sensitivity, and ignoring other relevant evidence of substitutability. It is apparent to me that the Tribunal ignored or overlooked the significance of certain indirect evidence which it was required to consider as a matter of law. Given this error of law, I feel that this is an appropriate case in which to exercise the Court’s power under subparagraph 52(c)(i) of the Federal Court Act [R.S.C., 1985, c. F-7 (as am. by S.C. 1990, c. 8, s. 17)] to make the determination that ought to have been made by the Tribunal. There are no conflicting evidentiary issues which remain to be resolved as far as product market is concerned and the Tribunal has provided an exhaustive record of the evidence. In my view, the Court is entitled to make the determination that the Tribunal should have rendered on the product market issue.
It should be noted that there is a distinction between a tribunal’s role in establishing facts on the one hand, and applying them to a legal framework on the other. With respect to the former, it is clear that the Tribunal is in a better position than the Court to fulfil those roles. However, it is evident that the Tribunal in this case ignored relevant evidence with respect to two important matters: functional interchangeability and inter-industry competition.
First, the Tribunal erred in ignoring evidence of functional interchangeability by summarily dismissing the relevance of that factor. In my opinion, functional interchangeability is a vital feature of substitutability and therefore an indispensable component of product market definition.
The Tribunal’s stated approach to product market definition noted that end use was a factor to be considered in the indirect framework. However, the Tribunal clearly failed to consider the importance of functional interchangeability, which is not simply one of many criteria to be considered but a central part of the framework. The only passage in which the Tribunal considered the matter of functional interchangeability or end use is found at page 238:
With respect to indirect evidence of the use of both for the same purpose, it is a matter of determining whether “purpose” can be inferred from the content of the advertisement and the circumstances related to the use of a particular vehicle. Almost by definition it can be said that community newspapers are used to reach customers in the respective areas where the papers are distributed and that dailies are used to reach customers throughout the Lower Mainland. It is not helpful to adopt this notion of purpose when evaluating whether dailies and community newspapers are effective substitutes.
The Tribunal considered the matter of functional interchangeability in two contexts—the first relating to substitution between electronic and print advertising and, second, in substitution between daily and community newspaper advertising. With respect to the first context, the Tribunal concluded that print and electronic media were not functionally interchangeable because “multiple price/product” advertising could not be produced in the electronic media (decision, at page 224).
With respect to advertising in the Pacific Dailies and the community newspapers, the Tribunal appears to have held that they were not functionally interchangeable because advertising in these publications did not serve the same purpose. As indicated in the quotation above, the Tribunal simply found that “purpose” could not be inferred from the content and circumstances of advertising in the Pacific Dailies and community newspapers. This, in my view, was an error.
If “multiple price/product” advertising is a relevant purpose for distinguishing between print and electronic media then it must also be relevant as between advertising in daily and community newspapers. The Tribunal found that this notion of purpose was not “helpful” because community newspapers were more local than the Pacific Dailies. But the fact that the community newspapers are more local in nature does not go to the question of functional interchangeability, but to the behaviour of buyers as to preference for geographical scope. This latter subjective factor should not be mingled with the purely objective factor of functional interchangeability which focusses on use or purpose. In my view, “multiple price/product” advertising is a sufficient use or purpose to conclude, on an objective basis, that advertising in the Pacific Dailies and the community newspapers are functionally interchangeable. This conclusion is further supported by the various product modifications, such as Flyer Force and the formation of community newspaper groups, which were intended to increase the similarities in use between the daily and community newspapers.
Generally, functional interchangeability will be regarded as a necessary but not sufficient condition to be met before products will be placed in the same market. There are other factors which may tend to reinforce, or undermine, a finding that two products are functionally interchangeable. It is appropriate here to discuss the second indirect matter of evidence that the Tribunal ignored — inter-industry competition.
Referring to competition between the Pacific Dailies and the community newspapers for advertisers, the Tribunal found that “there is little doubt that they have been striving to attract many of the same advertisers” (decision, at page 278). The Tribunal also found that the community newspapers were successful in attracting advertisers away from the Pacific Dailies and that the Pacific Dailies were concerned by the strength of the community newspapers (decision, at page 268). However, the Tribunal inexplicably rejected this evidence of “broad” competition in favour of a more focussed analysis (decision, at page 268):
Conclusions Regarding Product Market
The community newspapers are uncommonly strong in the Lower Mainland and the dailies are uncommonly weak. Unlike in any other Canadian city, there are prospering community newspapers in virtually all parts of the dailies’ city zone. The relative strength of the community newspapers outside the city zone is even greater. These facts concerned Pacific Press and it sought means of coping with the attraction of the community newspapers for advertisers. In broad terms, this shows that the two kinds of newspapers are “in competition”. However, a more focused analysis is required to determine whether they are in the same market, pursuant to s. 93 of the Act.
That “focused analysis” ultimately turned on two and only two strands of evidence—that relating to product modifications and price sensitivity (see discussion, supra , at pages 29-35 and decision, at pages 268-279). In my view, the Tribunal erred in ignoring the evidence of “broad” competition. The evidence of broad competitiveness is sufficient to show that there is competition in fact between the Pacific Dailies and the community newspapers. Southam’s subjective concerns were reflected in actions it undertook to compete with the community newspapers such as the introduction of Flyer Force (decision, at page 274). The Tribunal appeared to dismiss the evidence of inter-industry competition because the loss of Southam’s advertisers to the community newspapers was part of a “one-way flow” and that many advertisers who had switched to the community newspapers would not switch back to the Pacific Dailies in response to a price change. That “one-way flow” argument focusses entirely on the concept of price sensitivity.
Southam, at the very least, had an interest in stopping or slowing the one-way flow or even reversing it. Moreover, Southam introduced product modifications towards those ends. By focussing entirely on “one-way flow”, the Tribunal ignored evidence that there was competition for both present, and possibly, future advertisers. In short, there was competition in fact and the Tribunal erred in dismissing this evidence of “broad” competition.
I conclude that the Tribunal erred in ignoring (1) evidence of functional interchangeability between the Pacific Dailies and the community newspapers and (2) evidence of inter-industry competition. In my view, when these factors and the supporting evidence are considered in conjunction, it is clear that the Pacific Dailies and the community newspapers are in the same product market. The superior product argument, advanced by Southam and implicitly adopted by the Tribunal does not, in my view, defeat that conclusion.
It will be recalled that in the chapter on “Conclusions Regarding Product Market” the Tribunal stated that: “[t]he key question regarding the shift from the dailies to the community newspapers is whether this is the kind of substitution that occurs when a better product is introduced …. the superior product gradually replaces the existing product” (decision, at page 276). The superior product argument rests on the common sense understanding that although two products may be functionally interchangeable, they may be highly differentiated in other material respects such that any changes in price cannot reasonably be regarded as having an effect on buyer choice. For example, the differences between disposable and gold plated lighters, Timex and Rolex watches, or Lada and Rolls Royce automobiles, are such that it is simply unrealistic to place the respective products in the same market. In these examples, the primary differences are reflected in price, quality and brand name recognition. However, the fact that product differentiation exists does not automatically lead to the conclusion that each product is in a separate market; see Areeda, Antitrust Law, (1995), Vol. IIA, at paragraph 563.
The “superior product” argument is an exception to the general framework of market definition analysis and cannot be used to mask competition where competition exists. All products try to provide superior characteristics because that is the very nature of the competitive market place and the entrepreneurial spirit. As a result of innovation and improvement, products can build a market, sometimes at the expense of existing products. That is what appears to have happened in the Lower Mainland where community newspapers introduced a cheaper and apparently more effective product which achieved the same ends as the one offered by the Pacific Dailies. The best evidence that competition really existed was Southam’s preoccupation with the unparalleled success of the community newspapers and the combative measures which Southam initiated in response. By contrast, one would not expect Rolex executives to be overly concerned with the loss of customers to Timex or vice versa. In my opinion, evidence of inter- industry competition renders the superior product argument inapplicable to the case at bar.
VI — CONCLUSION
While evidence of substitutability through functional interchangeability and inter-industry competition was adduced, the Tribunal ultimately ignored such evidence. In doing so, the Tribunal adopted an overly narrow approach to substitutability as it dismissed “broad” conceptions of interchangeability and inter-industry competition. In doing so, the Tribunal erred in focussing predominantly on price sensitivity. In this case, the similarity of use between Pacific Dailies and community newspapers, and the competitiveness which existed between them, is sufficient to place both in the same product market.
This conclusion, of course, is not dispositive of this appeal. While the Pacific Dailies and the community newspapers are in the same product market, it remains to be determined whether the impugned merger would have the effect of lessening or preventing competition. This is the second step in the analysis under sections 92 and 93 of the Act which requires the Tribunal to make an evaluative judgment. It should be emphasized that merger analysis in Canada requires this two-step process. Otherwise, the factors listed in sections 92 and 93 of the Act for the purpose of evaluating the effects of a merger are rendered obsolete. The first step, the product market issue, in particular evidence of price sensitivity, must not be allowed to eclipse the vital evaluative aspect of Canadian merger law.
While the Tribunal went on to conclude that the Southam acquisition would not result in a substantial lessening of competition, it did not assess market shares or concentration and failed to evaluate that evidence having regard to the limitations found in subsection 92(2) of the Act. Nor did the Tribunal turn its attention to the factors listed in section 93 of the Act as required by that section. Those matters will have to be dealt with by the Tribunal.
Finally, it is necessary for me to make note on the issue of prevention of competition. The Director argued before the Tribunal that Southam’s acquisition prevented competition for two reasons. First, the acquisition prevented the formation of an effective community newspaper group. Second, the acquisition prevented the entry of a new daily, using one of the community newspapers as a springboard. The Tribunal rejected the first argument because of its finding that the community newspapers and the Pacific Dailies were not in the same product market, so that formation of a community newspapers group was irrelevant to the competition with the Pacific Dailies. In light of my determination that community newspapers and the Pacific Dailies are in the same product market, the Tribunal will have to reconsider that first argument put forth by the Director respecting prevention of competition.
On appeal before this Court, the Director presented a third argument that the Southam acquisition prevented competition. This argument suggests that the continuation of non-price competition between the Pacific Dailies and the community newspapers would have ultimately resulted in their becoming close substitutes (appellant’s memorandum of fact and law, paragraphs 152-157). As I understand it, that argument posits that the Southam acquisition eliminated the incentive for the community newspapers to engage in further product modifications, such as increasing the number of weekly editions, that would have made them closer substitutes for the Pacific Dailies. Since this argument was not raised in the pleadings below, nor before the Tribunal, it cannot be considered here.
VII — DISPOSITION
Pursuant to subparagraph 52(c)(ii) of the Federal Court Act, the appeal is allowed, the decision of the Tribunal dated June 2, 1992 (excepting that portion dealing with the print real estate market on the North Shore) is set aside and the matter remitted to the Tribunal for determination by a differently constituted panel in a manner consistent with these reasons. In accordance with the decision of this Court in American Airlines, Inc. v. Canada (Competition Tribunal), [1989] 2 F.C. 88(C.A.), the appellant is entitled to his costs on appeal.
Isaac C.J.: I agree.
Pratte J.A.: I agree.
[i] There is some confusion over whether anecdotal evidence of price sensitivity is to be classified as direct as opposed to indirect evidence. At p. 179 of its decision, the Tribunal classified anecdotal evidence relating to buyers’ willingness to switch products in response to price changes as indirect evidence. But, at p. 238, it referred to the testimony of the Director’s advertising witnesses adduced for the purpose of determining substitutability as evidence falling within the direct category. On appeal, the Director referred to anecdotal evidence of price sensitivity as indirect evidence. To avoid further confusion, I have employed the term direct evidence to include statistical and anecdotal evidence of price sensitivity.