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Mergers and Competition: The Brewing Case*

Published online by Cambridge University Press:  07 November 2014

J. C. H. Jones
J. C. H. Jones*
Affiliation:
University of Victoria
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Extract

In 1960, the first major decision of any doctrinal importance concerning mergers under section 32 of the Combines Investigation Act was handed down in the Supreme Court of Ontario. This decision established that there is no merger problem under the Act unless the fusion of firms creates a monopoly situation. Such a test, aside from being incomprehensible in economic terms, is based on a narrow legal premise (that may or may not be legally correct) which, taken together with the decision in R. v. British Columbia Sugar Refining Co. Ltd. and the inexplicable decision of the Crown to appeal neither case, has resulted in complete emasculation of the merger section of the Act. In effect, mergers have ceased to become an economic problem.

The purpose of this paper is to reevaluate the Brewing case solely in terms of economic criteria, by putting economic flesh on the bones of the statutory offence: “merger … which has operated or is likely to operate to the detriment or against the interest of the public.” Such criteria as will be erected are generally applicable to the section because here the application of appropriate economic criteria requires not so much a change in the Act as a better and more sophisticated treatment in the courts.

L'arrêt de 1961 dans l'affaire R. ν Canadian Breweries signifie que les fusions ne constituent plus un problème économique selon la Loi relative aux Enquêtes sur les Coalitions. La présente étude reconsidère le cas sur la base que toute coalition ayant pour effet d'accroître démesurément le pouvoir sans pour autant entraîner des économies d'échelle réelles est contraire à l'intérêt publique. On conclut qu'un pouvoir injustifié existe.

Le contrôle du marché est possédé tant individuellement que conjointement par Canadian Breweries, Labatt et Molson. Un tel pouvoir se fonde sur le petit nombre de producteurs, un produit techniquement homogène, la fixation des prix, l'effet néfaste de l'intervention des pouvoirs publiques et en conséquence l'accent sur la publicité et la promotion des ventes. Les coûts de distribution sont tels que les unités de production doivent être dispersées dans les différentes régions et, à cause des montants élevés consacrés à la publicité à travers les media «nationaux», les brasseurs «régionaux» se trouvent dans une position concurrentielle très désavantageuse.

Il s'ensuit qu'un défi aux «trois grands» de la part des concurrents existants est fort peu probable. De la même façon, les coûts de la publicité en conjonction avec le contrôle des brasseurs sur la distribution constituent la principale barrière à l'entrée de nouveaux concurrents rendant très improbable tout défi sérieux de la part des producteurs éventuels. De plus, les éléments dynamiques n'opèrent pas réellement. La demande croît très lentement et la capacité existante peut faire face à des augmentations substantielles de la demande.

Les économies d'échelle ne semblent pas importantes et ne justifient pas la disparition des brasseurs régionaux. De toute évidence, les économies d'échelle qui existent ne justifient pas qu'on passe sous silence l'acquisition d'un contrôle injustifié du marché.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 33 , Issue 4 , November 1967 , pp. 551 - 568
Copyright
Copyright © Canadian Political Science Association 1967

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Footnotes

*

This article is based on the author's doctoral thesis at Queen's University. The author would like to express his thanks to his supervisor, Professor L. A. Skeoch, and to the Combines Branch who eased his access to the trial record. For the present paper helpful comments were made by Professor Skeoch and by Professor G. R. Elliott of the University of Victoria. The intention of the paper is not to challenge the legality of court decisions with respect to brewing, but to apply the rather different criteria of economic analysis to the brewing industry.

References

1 R. v. Canadian Breweries, Criminal Reports, vol. 33, 1960.Google Scholar Prior to 1960 the only other merger cases to come to court were R. v. Canadian Import Co. (1933), R. v. Staples (1940), and R. v. Eddy Match (1952). None of these cases provided any clear criteria by which merger could be judged under section 32.

2 See R. v. British Columbia Sugar Refining Co. Ltd. et al. (1960) WWR (NS) 577.

3 The 1960 amendments to the Act make no real difference to the substance of the offence or the criteria by which it is judged.

4 See Dirlam, J. B. and Kahn, A. E., “Antitrust Law and the Big Buyer: Another Look at the A. & P. Case,” Journal of Political Economy, 60 (1952).CrossRefGoogle Scholar

5 Restrictive Trade Practices Commission, Report Concerning an Alleged Combine in … Beer (Ottawa 1955) 15–16 Google Scholar (hereafter shortened to Beer Report).

6 In 1962, Canadian Breweries, Labatt, and Molson acquired the three breweries in Newfoundland: Bennett Brewing Co., Bavarian Brewing Ltd., Newfoundland Brewery Ltd. As yet they do not ship to the mainland or PEI.

7 See Beer Report, 29-30; R. v. Canadian Breweries, Daily Transcript of Proceedings (hereafter shortened to TP), p. 3041.

8 See for example, TP, 1949A.

9 Ibid., 2241, 2522–8.

10 For examples referred to in this paragraph, see ibid., 4647–90.

11 Ibid., 5129.

12 Ibid., 5151.

13 Ibid., 4692–3.

14 Ibid., 1424–8, 1658.

15 Ibid., 1804.

16 Exhibit 729 in R. v. Canadian Breweries (hereafter cited as Trial Exhibits).

17 Trial Exhibits 252, 272, and 273.

18 The only big-three division brand to show a decline was Bradings which was absorbed by Carling in 1960.

19 Calculated from Trial Exhibit 907.

20 Calculated from ibid. 252, 272, 902 and 907.

21 This was stressed by the officers of Canadian Breweries and the demise of many breweries absorbed by the big three was explained in these terms. See TP at 5029, 5030, 5044, and Trial Exhibit 957, 55.

22 TP, 2402–3. Salesmen represented the greatest single cost.

23 This would accord with the documentary evidence, e.g. “with really only three companies involved and with total sales and advertising budgets of $20 million a year in the two provinces which expenditures do not significantly improve per capita consumption. …” Trial Exhibit 256.

24 Such agreements were signed in Quebec in 1947, 1948, 1950, and 1958. See TP, 1208–22.

25 See Stigler, G. J., “A Theory of Oligopoly,” Journal of Political Economy, LXXII, no. 2 (1964).Google Scholar

26 Bain, J. S., “Conditions of Entry and the Emergence of Monopoly,” in Chamberlin, E. H., ed., Monopoly and Competition and Their Regulation (London, 1964), 226.Google Scholar

27 Trial Exhibit 128. The figures exclude appropriations for Western Canada Breweries.

28 When one of the big three moved into a new region he was faced with intensified promotion from the existing firms, e.g., when Labatt acquired Lucky Lager in 1958, the periodical and newspaper advertising budget of Western Canada Breweries increased from $143,700 (1958) to $286,700 (fiscal 1959). Ibid., 263.

29 TP, 2186–7.

30 Ibid., 2755 and Trial Exhibit 648.

31 TP, 2406–7.

32 Figures provided by the Dominion Brewers Association. The same pattern evident throughout Canada whether per capita or adult (20 years and over) per capita consumption is used.

33 Calculated from ibid and the Brewing Age Blue Books.

34 See Stigler, G. J., “The Economies of Scale,” Journal of Law and Economics, I (1958).Google Scholar

35 Trial Exhibit 966.

36 The figures in this paragraph were calculated from Trial Exhibit 960 and the Brewing Age Blue Book.

37 See TP, pp. 266, 277, 1204, 4879–85.

38 For the fiscal year ending Oct. 31, 1959, the promotional budget for this division was $1,400,000, (Trial Exhibit 128) and sales for 1958 were $16,490,804.

39 Ibid., 257.