Ministère de la Justice Canada
Bureau de la concurrence Services juridiques
Place du Portage, Tour I 22e étage 50, rue Victoria Gatineau QC K1A 0C9
Department of Justice Canada
Competition Bureau Legal Services
Place du Portage, Phase I 22nd Floor 50 Victoria Street Gatineau, QC K1A 0C9
Téléphone/Télécopieur (613) 818-1611
Telephone/Fax (819) 953-9267
November 16, 2022
BY EMAIL The Registrar Competition Tribunal Thomas D'Arcy McGee Building 90 Sparks Street, Suite 600 Ottawa, ON K1P 5B4
Dear Sir/Madame: Re: CT-2022-002 – Commissioner of Competition v. Rogers Communications Inc. and Shaw Communications Inc.
We ask that a copy of this letter and its attachment be provided to the panel members for the above noted proceeding.
During the opening day of oral hearings on November 7, 2022 Chief Justice Crampton indicated that it would be helpful for the Commissioner to clearly set out his position regarding balancing weights given that it is his burden to establish anti-competitive effects contemplated by section 96 of the Act. 1
The purpose of this letter is to set out the Commissioner’s position at the outset of this proceeding, which will be the subject of further submissions in closing argument after the evidentiary portion of this hearing concludes.
The Commissioner’s position is as follows: 1. The effects of a merger include a loss of allocative efficiency (deadweight loss) and redistributive effects (wealth transfer). 2
1 Transcript Day 1, November 7, 2022, p. 9, ll. 9-13. 2 See Competition Bureau, Merger Enforcement Guidelines, October 6, 2011 (MEGs), paras. 12.21 to 12.31.
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The Commissioner has filed expert evidence to assist the Tribunal in its assessment of the redistributive effects of the proposed merger of Rogers and Shaw. The expert report of Nathan Miller (the “Miller Report”) includes an estimate of changes in producer and consumer surplus, deadweight loss, and the transfer from consumers to producers from higher prices paid on the post-merger quantity. 3 The expert report of Katherine Cuff (“Cuff Report”) includes an identification of average tax rate by income decile and for the Top 1%. 4 The expert report of Lars Osberg (the “Osberg Report”) includes an estimate of the shareholdings of Rogers post-merger, the distribution of financial assets by income decile, and the distribution of expenditures on cell phone services by income decile. 5
In its Superior Propane redetermination decision 6 the Tribunal found that the redistributive effects of a merger can be measured in two ways. One way to consider redistributive effects is to identify what portion of a transfer of wealth is socially adverse and to add that socially adverse portion to the deadweight loss (“Socially Adverse Transfer”). 7 Another way to consider redistributive effects is to weight changes in consumer surplus relative to producer surplus (“Balancing Weights”). 8 In the Balancing Weights approach, the anticompetitive effects equal the weighted sum of changes in consumer and producer surplus.
The Canadian tax system can be informative of the relative weights to place on different income groups. 9 A weight can also be identified that would result in the same anticompetitive effects as under the Socially Adverse Transfer approach. In addition, a balancing weight can also be calculated to find the relative weight to place on consumers that would equalize the change in weighted consumer and producer surplus such that if the weight were greater than the balancing weight then the merger would result in more harm than benefit.
The Commissioner provided the Respondents with a spreadsheet on October 12, 2022 setting out his position on both approaches to including redistributive effects in the anticompetitive effects. This spreadsheet is enclosed with the letter.
The following provides a narrative of the content of the spreadsheet.
3 Expert Report of Nathan H. Miller, September 21, 2011, exhibits 21, 23, and 27. Note that the change in deadweight loss is the sum of the change in producer and consumer surplus, therefore the change in producer surplus is equal to the change in deadweight loss less the change in consumer surplus. 4 Expert Report of Katherine Cuff, September 21, 2022, exhibit 4. 5 Expert Report of Lars Osberg, September 21, 2022, paragraph 11, tables 1.3 and 2.1.5 . 6 Commissioner of Competition v. Superior Propane Inc., 2002 Comp. Trib. 16 aff’d 2003 FCA 53. 7 Ibid., at paras. 365-368. 8 Ibid., at para. 338. 9 Ibid., at para. 110 (“If, for example, the lowest tax rate is 20 percent and the highest is 50 percent, there is clear indication that low-income individuals are favoured over high-income individuals; assigning a weight of 1.0 to the latter group, the corresponding weight on the former would be 2.5.”)
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Socially Adverse Transfer 7. From the Cuff Report, three broad income groups can be identified in the Canadian tax system: (i) a low income group from the first to fourth income decile, (ii) a middle income group from the fifth to eighth income decile, and (iii) a high income group from the ninth to tenth income decile. While a very high income group consisting of the top 1% can also be identified most of the available data is by income decile. The Osberg Report makes clear that the Rogers and Shaw Families are clearly at the top of the income distribution, well above the Top 1% threshold. 10 Low income groups generally have negative effective tax rates once refundable tax credits are taken into account. Middle income groups have positive effective tax rates but still benefit from various tax credits. High income groups tend not to be eligible for tax credits.
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From the Osberg Report, three broad categories of shareholders are identified: (i) Rogers and Shaw family members, (ii) international investors, and (iii) other domestic shareholders.
Transfers between each group of consumers and producers that are considered to be socially adverse are calculated in proportion to their share of expenditures on cell phone services and ownership share in the post-merger Rogers.
The portion of the transfer considered socially adverse is applied to different measures of the transfer. These measures relate to estimates from the Miller Report using different models (8-brand and 11-brand), different elasticities (0.5 and 0.1), and considering just the merger or both the merger and divestiture.
Balancing Weights 11. For consumers and domestic shareholders, the Commissioner has considered weights by income decile and for the Top 1% of income earners in proportion to the tax system. Weights can be calculated based on the average tax rate, the percent of income available (which equals one minus the average tax rate), and the federal and provincial tax brackets. The federal and provincial tax brackets are calculated on a separate tab “Tax Brackets”. The Commissioner assigns a weight of zero to international shareholders.
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These weights are then applied to producers in proportion to their ownership share of post-merger Rogers and consumers in proportion to their share of expenditure on cell phone services.
The anticompetitive effects are calculated by multiplying the consumer surplus by the weight and then adding the producer surplus.
10 Osberg Report, para. 14.
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Each of the three weights is applied to the different measures of change in consumer surplus from the Miller Report and added to the corresponding measure of change in producer surplus. The Miller Report uses different models (8-brand and 11-brand), different elasticities (0.5 and 0.1), and considers just the merger and both the merger and divestiture.
Finally, a weight is selected that results in the same anticompetitive effects under the weighted surplus approach as under the socially adverse transfer approach. These weights are reported for comparison purposes and to demonstrate the link between the two different approaches.
We trust the foregoing will be of assistance with respect to the comments of the Chief Justice.
Sincerely yours,
Derek Leschinsky Senior Counsel Competition Bureau Legal Services
c.
Jonathan Lisus, Crawford Smith (Lax O’Sullivan Lisus Gottlieb) Kent Thomson, Derek Ricci (Davies Ward Phillips & Vineberg LLP) John Rook, Emrys Davis (Bennett Jones LLP)
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% of households with 0 Income cell phones P0-10 20.7 P11-20 25.9 P21-30 14.3 P31-40 7.7 P41-50 5.6 P51-60 4.4 P61-70 1.4 P71-80 1.2 P81-90 2.4 P91-100 3.6 Note: The expenditure of the lowest decile was not reported because of reliability issues, it has been replaced with the expend Source: Osberg Report, Table 2.1.5
Producer Share of Transfer
Group Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Rogers/Shaw Family International Source: Osberg Report, paragraph 11 and Table 1.3
Socially Adverse Transfer Transfer from / to All Consumers / International Shareholders All Consumers / Rogers & Shaw Family Low Income Consumers to Middle and High Income Domestic Shareholders
Group Share of Post-Merger Rogers 41.30% 41.30% 41.30% 41.30% 41.30% 41.30% 41.30% 41.30% 41.30% 41.30% 33.20% 25.50%
25.50% 33.20% 8.92%
Middle Income Consumers to High Income Domestic Shareholders Proportion of Transfer Considered Socially Adverse
Anticompetitive Effects (millions) Merger Deadweight Loss Transfer Socially Adverse Transfer Anticompetitive Effects Source: Miller Report, Exhibit 21
Merger & Divestiture Deadweight Loss Transfer Socially Adverse Transfer Anticompetitive Effects Source: Miller Report, Exhibit 23
Merger, Elasticity of 0.1 Deadweight Loss Transfer Socially Adverse Transfer Anticompetitive Effects Source: Miller Report, Exhibit 27
8.64% 76.26%
8-Brand Model -$ 324 -$ 6 19 -$ 472 -$ 7 96
8-Brand Model -$ 42 -$ 63 -$ 48 -$ 90
8-Brand Model -$ 1 84 -$ 1,012 -$ 772 -$ 9 56
Average % of household Average % of income spent household income on cell phone spent on cell phone services, for services, for households households with ≥1 cell including zero Average phone cell phones income * * $ 13,657 3.3 2% $ 28,513 2.5 2% $ 41,365 2.1 2% $ 55,115 1.9 2% $ 69,755 1.7 2% $ 85,910 1.5 1% $ 104,324 1.4 1% $ 128,114 1.2 1% $ 160,850 0.9 1% $ 282,390 replaced with the expenditure of the second lowest decile
Income Decile P0-10 P11-20 P21-30 P31-40 P41-50 P51-60 P61-70 P71-80 P81-90 P91-100 NA NA
Group & Income Decile Income Share of Decile Financial Share of Assets Transfer 1.50% 0.62% 1.90% 0.78% 3.30% 1.36% 5.20% 2.15% 7.40% 3.06% 8.60% 3.55% 11.20% 4.63% 12.90% 5.33% 16.60% 6.86% 31.30% 12.93% NA 33.20% NA 25.50%
Average Cell Phone Expenditure $ 697.23 $ 697.23 $ 886.25 $ 1,068.29 $ 1,251.13 $ 1,396.21 $ 1,542.95 $ 1,772.07 $ 1,883.88 $ 2,450.02
Income Decile Share of Cell Phone Expenditure 5% 5% 6% 8% 9% 10% 11% 13% 14% 18%
11-Brand Model -$ 322 -$ 582 -$ 444 -$ 766
11-Brand Model -$ 7 0 -$ 116 -$ 8 8 -$ 158
11-Brand Model -$ 182 -$ 971 -$ 741 -$ 923
Weights Implied by the Canadian Tax System
Mean Effective Average Tax Rate Income Average income (with payroll taxes) P0-10 $ 13,657 0.8 P11-20 $ 28,513 1.95 P21-30 $ 41,365 2.8 P31-40 $ 55,115 5.9 P41-50 $ 69,755 10.2 P51-60 $ 85,910 13.6 P61-70 $ 104,324 16.55 P71-80 $ 128,114 19.35 P81-90 $ 160,850 21.45 P91-100 $ 282,390 25.35 Top 1% 31.7 International NA Notes: Top 1% used for Rogers/Shaw Family; tax rates are for individuals while average income is for households. Source: Cuff Report, Exhibits 1, 4, & 7; Osberg Report, Table 2.1.5; Tab 'Tax Brackets'
Share of Producer Surplus
Group Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Other Domestic Shareholders Rogers/Shaw Family International Source: Osberg Report, paragraph 11 and Table 1.3
Group Share of Post-Merger Rogers Income Decile 41.30% P0-10 41.30% P11-20 41.30% P21-30 41.30% P31-40 41.30% P41-50 41.30% P51-60 41.30% P61-70 41.30% P71-80 41.30% P81-90 41.30% P91-100 33.20% NA 25.50% NA
Average Producer Weight (Average Tax Rate) Producer Weight Normalized to Unity
Average Producer Weight (Available Income) Producer Weight Normalized to Unity
Average Producer Weight (Fed & Prov Tax Bracket) Producer Weight Normalized to Unity
Share of Consumer Surplus Average % of household income spent on cell phone services, for % of households with 0 households with ≥1 Income cell phones cell phone P0-10 20.7 * P11-20 25.9 3.3 P21-30 14.3 2.5 P31-40 7.7 2.1 P41-50 5.6 1.9 P51-60 4.4 1.7 P61-70 1.4 1.5 P71-80 1.2 1.4 P81-90 2.4 1.2 P91-100 3.6 0.9 Top 1% International Note: The expenditure of the lowest decile was not reported because of reliability issues, it has been replaced with the expend Source: Osberg Report, Table 2.1.5
Average Consumer Weight (Average Tax Rate) Consumer Weight, relative to a Producer Weight of Unity
Average Consumer Weight (Available Income) Consumer Weight, relative to a Producer Weight of Unity
Average Consumer Weight (Fed & Prov Tax Bracket) Consumer Weight, relative to a Producer Weight of Unity
Anticompetitive Effects (millions) Merger Deadweight Loss Consumer Surplus Producer Surplus Weighted Consumer Surplus (Average Tax Rate) Weighted Consumer Surplus (Available Income) Weighted Consumer Surplus (Fed & Prov Tax Bracket) Anticompetitive Effects (Average Tax Rate) Anticompetitive Effects (Available Income) Anticompetitive Effects (Fed & Prov Tax Bracket) Source: Miller Report, Exhibit 21
Merger & Divestiture Deadweight Loss
8-Brand Model 11-Brand Model -$ 324 -$ 322 -$ 669 -$ 631 $ 345 $ 309 -$ 2,267 -$ 2 ,138 -$ 1,008 -$ 951 -$ 1,129 -$ 1 ,065 -$ 1,922 -$ 1 ,829 -$ 663 -$ 642 -$ 784 -$ 756
8-Brand Model 11-Brand Model -$ 42 -$ 70
Consumer Surplus Producer Surplus Weighted Consumer Surplus (Average Tax Rate) Weighted Consumer Surplus (Available Income) Weighted Consumer Surplus (Fed & Prov Tax Bracket) Anticompetitive Effects (Average Tax Rate) Anticompetitive Effects (Available Income) Anticompetitive Effects (Fed & Prov Tax Bracket) Source: Miller Report, Exhibit 23
Merger, Elasticity of 0.1 Deadweight Loss Consumer Surplus Producer Surplus Weighted Consumer Surplus (Average Tax Rate) Weighted Consumer Surplus (Available Income) Weighted Consumer Surplus (Fed & Prov Tax Bracket) Anticompetitive Effects (Average Tax Rate) Anticompetitive Effects (Available Income) Anticompetitive Effects (Fed & Prov Tax Bracket) Source: Miller Report, Exhibit 27
Weight Implied by the Socially Adverse Transfer Merger Anticompetitive Effects Weight (Found by Goal Seek) Consumer Surplus Producer Surplus Weighted Consumer Surplus Anticompetitive Effects
Merger & Divestiture Anticompetitive Effects Weight (Found by Goal Seek) Consumer Surplus Producer Surplus Weighted Consumer Surplus Anticompetitive Effects
Merger, Elasticity of 0.1 Anticompetitive Effects Weight (Found by Goal Seek) Consumer Surplus Producer Surplus Weighted Consumer Surplus Anticompetitive Effects
-$ 78 -$ 128 $ 36 $ 58 -$ 264 -$ 434 -$ 118 -$ 193 -$ 132 -$ 216 -$ 228 -$ 376 -$ 82 -$ 135 -$ 96 -$ 158
8-Brand Model 11-Brand Model -$ 184 -$ 182 -$ 1,097 -$ 1 ,062 $ 913 $ 880 -$ 3,717 -$ 3 ,599 -$ 1,653 -$ 1 ,600 -$ 1,852 -$ 1 ,793 -$ 2,804 -$ 2 ,719 -$ 740 -$ 720 -$ 939 -$ 913
8-Brand Model 11-Brand Model -$ 796 -$ 766 1.71 1.70 -$ 669 -$ 631 $ 345 $ 309 -$ 1,141 -$ 1 ,075 -$ 796 -$ 766
8-Brand Model 11-Brand Model -$ 90 -$ 158 1.62 1.69 -$ 78 -$ 128 $ 36 $ 58 -$ 126 -$ 216 -$ 90 -$ 158
8-Brand Model 11-Brand Model -$ 956 -$ 923 1.70 1.70 -$ 1,097 -$ 1 ,062 $ 913 $ 880 -$ 1,869 -$ 1 ,803 -$ 956 -$ 923
Weight implied by average tax rate 39.63 16.26 11.32 5.37 3.11 2.33 1.92 1.64 1.48 1.25 1.00 0 e is for households.
Weight implied by Percent of available Income Available income 99.2 98.05 97.2 94.1 89.8 86.4 83.45 80.65 78.55 74.65 68.3
1.45 1.44 1.42 1.38 1.31 1.27 1.22 1.18 1.15 1.09 1.00 0
Applicable Federal and BC, Weight implied AB, ON Tax by federal tax Bracket bracket 20.95% 2.29 20.95% 2.29 20.95% 2.29 29.50% 1.63 29.50% 1.63 30.09% 1.60 37.19% 1.29 37.70% 1.27 42.30% 1.14 47.88% 1.00 48.06% 1.00 0
Group & Income Income Decile Share of Decile Share of Financial Assets Producer Surplus 1.50% 0.62% 1.90% 0.78% 3.30% 1.36% 5.20% 2.15% 7.40% 3.06% 8.60% 3.55% 11.20% 4.63% 12.90% 5.33% 16.60% 6.86% 31.30% 12.93% NA 33.20% NA 25.50%
1.59 1.00
0.83 1.00
0.87 1.00
Average % of household income spent on cell phone services, for households including zero cell phones Average income * $ 1 3,657 2% $ 2 8,513 2% $ 4 1,365 2% $ 5 5,115 2% $ 69,755 2% $ 85,910 1% $ 104,324 1% $ 128,114 1% $ 160,850 1% $ 282,390
Average Cell Phone Expenditure $ 697.23 $ 697.23 $ 886.25 $ 1 ,068.29 $ 1 ,251.13 $ 1 ,396.21 $ 1 ,542.95 $ 1 ,772.07 $ 1 ,883.88 $ 2 ,450.02
Income Decile Share of Cell Phone Expenditure 5% 5% 6% 8% 9% 10% 11% 13% 14% 18%
s been replaced with the expenditure of the second lowest decile
5.39 3.39
1.24 1.51
1.47 1.69
Federal and Provincial income tax schedules Applicable Average Federal Tax Income income Bracket AB BC P0-10 $ 13,657 15% 10.00% P11-20 $ 28,513 15% 10.00% P21-30 $ 41,365 15% 10.00% P31-40 $ 55,115 20.50% 10.00% P41-50 $ 69,755 20.50% 10.00% P51-60 $ 85,910 20.50% 10.00% P61-70 $ 104,324 26% 10.00% P71-80 $ 128,114 26% 10.00% P81-90 $ 160,850 29% 13.00% P91-100 $ 282,390 33% 14.00% Top 1% 33% 15.00% International Source: Cuff Report, Exhibits 1 & 7; Osberg Report, Table 2.1.5
5.06% 5.06% 5.06% 7.70% 7.70% 10.50% 12.29% 14.70% 16.80% 20.50% 20.50%
ON
5.05% 5.05% 5.05% 9.15% 9.15% 9.15% 11.16% 11.16% 12.16% 13.16% 13.16%
Population Weighted Provincial Average 5.95% 5.95% 5.95% 9.00% 9.00% 9.59% 11.19% 11.70% 13.30% 14.88% 15.06%
Provincial Population (Q3 2022) AB BC ON Persons 4,543,111 5,319,324 15,109,416 Percent 18% 21% 61% Source: Statistics Canada. Table 17-10-0009-01 Population estimates, quarterly https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000901
Applicable Federal and BC, AB, ON Tax Bracket 20.95% 20.95% 20.95% 29.50% 29.50% 30.09% 37.19% 37.70% 42.30% 47.88% 48.06%