Backgrounder: What is competition law? - Sotos Class Actions
August 23, 2019

Backgrounder: What is competition law?


Competition is everywhere. In a free-market economy, companies compete for customers, buyers compete for manufacturers, employers compete for employees, etc.

The theory is that, when enough participants compete, companies make what people want and offer it at a price that will sell. A competing company with a better product will attract consumers. If consumers can find an equivalent product for a better price, they will vote with their wallets. Competition, when it works, is supposed to be good for businesses and consumers alike. It lowers prices and encourages innovation.

Challenges to competition

The theory seems to work when there are enough competitors in the market, and when market participants have enough information to make good decisions.

Market power: monopolies, cartels and dominance

A fundamental challenge to competition is that successful competitors prosper and grow. When they grow too big, they may stifle their competitors. When you only have one seller (a monopoly) or a small number of sellers (an oligopoly), the market is less competitive. That is, there is less competitive pressure for sellers to keep prices down, maintain product quality, and invest in innovation.

Another problem is that profits are alluring. In a market with only a few sellers, the sellers may decide not to compete as fiercely, and cooperate in their mutual interests. For example, they might agree to maintain higher prices (price fixing), or coordinate bids for business (bid rigging). In law, this is called a "conspiracy", and companies that conspire are called a "cartel". These activities are illegal.

Even without cartel agreements, a company with enough "market power"[efn_note]"Market power" is sort of like it sounds, but technically it refer's to a company's ability to raise prices above the price that it would prevail in a competitive market: R. S. Khemani and D. M. Shapiro, "Glossary of Industrial Organisation Economics and Competition Law" (OECD, 1993), available online (pdf).[/efn_note] can use its economic strength to prevent or limit competition. For example, it might do things to prevent new participants from entering the market. This includes selling products below cost or offering steep rebates to exclude rivals (predatory pricing). It can also include selling multiple related products together at a low price (bundling). The tricky thing with this kind of activity is that discounts, rebates, and bundles can be good for consumers -- until they're not. If the effect of these discounts is to eliminate or limit competition, it harms consumers in the long term.


On the information side, markets will not operate efficiently if consumers are unable to make informed decisions for themselves. The law thus promotes competition in two ways: (1) it ensures that firms do not mislead consumers; and (2) it encourages firms to disclose sufficient and useful information to assist consumers' decision-making.

Consumers need enough information to compare competing goods and services. Specifically, they need to be able to identify what they need and what it's worth. So, where a company makes deceptive claims about its products or misleads consumers about the benefits it offers, it's bad for the market.

Sometimes, the best solution to this problem is to require disclosure from companies. Think: the ingredients list on food products, health warnings on tobacco, franchising rules, or breakdowns of fees on bank or telco websites. But disclosure, alone, doesn't always work.

Competition depends on the rationality of consumers, and on consumers' ability to identify good deals. In reality, economists describe consumers are "boundedly rational". For background on bounded rationality, see: John Conlisk, “Why Bounded Rationality?,” (1996) 34:2 Journal of Economic Literature 669. It's time-consuming and difficult to search for and process information, and make decisions. Consumers have jobs to do, kids to raise, exams to write, and so on, and they cannot devote their full attention to finding good deals. There are also cognitive limitations on people's ability to process complex information.

Firms, on the other hand, exist to make profits. They can devote considerable resources toward discovering and processing profit-maximizing information. Thus, even when information is available to consumers, it may be too copious or complicated, such that the important details remain hard to find. Alternatively, sellers may present the information in a way that confuses or manipulates consumers, or otherwise exploits the bounds of their rationality. Geraint G. Howells, "The Potential and Limits of Consumer Empowerment by Information" (2005) 32:3 Journal of Law and Society 349. For an in-depth analysis of the limitations of mandated disclosure, see: Omri Ben-Shahar & Carl E. Schneider, "The Failure of Mandated Disclosure" (2011) 159 University of Pennsylvania Law Review 647.

Competition enforcement in Canada

Canada has an endlessly complex patchwork of laws and regulators to promote competition.

The federal Competition Bureau is the main agency responsible for promoting competitive markets. It is supposed to investigate violations of Canada's Competition Act (and certain other laws), including price fixing and cartels, misleading marketing practice, abuse of dominance, mergers, etc. This is a pretty big mandate, so its enforcement capabilities are limited.

For certain offences (including conspiracy and false representations), the Competition Act allows private parties to claim compensation in the courts. For example, the victim of a price-fixing conspiracy may start a class action. Compared with the US, private-enforcement rights in Canada are much narrower.

The provinces, for their part, regulate consumer interactions generally. So, in Ontario, false advertising, misrepresentations and aggressive sales tactics are contrary to Ontario's Consumer Protection Act, and the price and quality of goods sold under contract are regulated under the Sale of Goods Act.

Some industries, like banking, air transport, and telecommunications, are regulated by the Federal government. So, phone companies, for example, fall under the jurisdiction of the CRTC but provincial consumer protection laws still apply to them. Again, enforcement of these laws generally relies on a combined effort of public agencies and private lawsuits.