A man walks along the embankment of the river Spree during sunset in Berlin, on Sept. 13, 2013.Reuters
Robert D. Atkinson is the founder and president of the Information Technology and Innovation Foundation, a think tank for science and technology policy.
Amid an increasingly tense political and economic environment, it is easy to overlook the seemingly measured but far-reaching reform of Canada’s competition laws that is under way.
Two bills – C-56, the already enacted Affordable Housing and Groceries Act, and C-59, the pending Fall Economic Statement Implementation Act – are radically reshaping Canadian competition law to, as the Department of Finance puts it, “ensure that our marketplaces promote fairness, affordability and innovation.” Yet, the changes these bills are making to reduce market concentration in the Canadian economy pose grave risks to the future of the innovation that is essential to keeping Canada’s innovation economy from declining even more.
Canada’s economy is at a crossroads.
Its homegrown innovation – inventions and innovations developed on its own without foreign participation – grew by just a fraction of the growth recorded in the United States and Britain, expanding by a total of 0.11 per cent from 1990 to 2012. While the government’s report on competition policy claims that increased concentration is a problem, there has not been any Statistics Canada data since 2009 that adequately measures the state of concentration in Canada, leaving no evidence that Canada has problematic levels.
Indeed, many have noted the vanishing of both Canada’s leading innovators and the world-class status many of its firms once enjoyed. In other words, the decline in Canadian dynamism is much more likely the result of a reduction in the concentration and scale that drives innovation, rather than the opposite.
Unfortunately, the changes to Canada’s Competition Act will only continue to stifle the innovation that Canada desperately needs.
First, Bill C-56 adopts the European Union approach by banning “excessive pricing,” or the charging of prices thought to be unfairly high. Not only is the freedom to price essential to any free-market system, such as by signalling to firms which markets may be ripe for entry, but in high-tech and dynamic industries, prices must account not just for costs but also for investments in future technologies.
On paper, the government’s proposal may sound reasonable, but the calculation of what qualifies as excessive is practically impossible for regulators to get right, resulting in a chilling effect on innovation.
Second, Bill C-56 eliminated the efficiencies defence from merger reviews – the core argument raised by merging firms that their deal will result in cost savings or increased innovation that, on balance, benefits consumers. This change is highly problematic and will hurt already anemic Canadian productivity growth. Many transactions that may appear to have the ability to reduce competition also result in efficiencies that benefit consumers (for example, increased scale that can drive productivity and innovation), which vastly outweighs what often turn out to be minor or fleeting harms to competition.
Bill C-59 threatens to make matters worse.
Specifically, it proposes to empower the Canadian Competition Tribunal by allowing it to strike down a merger simply because it increases market concentration.
Market concentration is a poor indicator of overall competitive effects because scale can often drive the investments and innovation that contribute to long-run economic growth. Moreover, increases in market concentration can often be beneficial, especially in industries with already low levels. Taken with Bill C-56′s ban on efficiencies, the tribunal would be empowered to condemn mergers simply based on concentration measures alone – regardless of their ultimate benefits.
The consequences of the European approach to competition policy that Canada is now implementing are clear. Europe remains plagued by technological stagnation and still more bureaucracy – regulation, rather than innovation. Meanwhile, the model focused on promoting consumer welfare and innovation has led to the rise of unprecedented dynamism and the U.S. technology giants that are the envy of the world.
The Canadian government should focus competition policy on conduct, not on structure. This means worrying less about the size of firms and more about addressing specific anti-competitive conduct and helping all firms increase their productivity. To keep Canada an economic and innovation leader in the 21st century, it must abandon its current course of well-intentioned but mistaken competition reform before it is too late.