Daniel Dufort is president and chief executive officer at the Montreal Economic Institute, where Gabriel Giguère is a public policy analyst.
Politicians like to think they’re the smartest people in the room, no matter the topic. Their interference in the market, however, tells a different story.
The federal government’s latest attempt to upend competition policy, Bill C-56, is one more example of this. With this bill, Ottawa proposes to do away with the long-standing efficiency criteria in Canada’s competition laws in order to fight what it calls anti-competitive mergers.
Currently, firms can justify mergers and acquisitions based on the concept of economic efficiency. The simplistic notion behind the Trudeau government’s move is that the more firms there are in a market, the better off consumers will be.
Unfortunately, competition is much more complex than just looking at how many firms operate in a given market, or which firm has what market share at a specific point in time.
There is simply no magic number of telecom companies, grocery chains or gizmo manufacturers needed for Canada’s economy to be competitive.
Rather, a competitive economy relies on new players being able to come into the market, and outdated ones being forced out by consumer decisions if they fail to adjust. It’s what drove away Sears, Eaton’s, Steinberg and Target, and allowed Amazon, Simons and Sephora to grow and take their place.
The reason these stores were able to grow is that the legal and regulatory barriers to entry were low enough for them to come in and challenge the incumbents. It wasn’t that some massive government inquiry determined there needed to be one more player in the cosmetics retail sector, for instance.
There are also cases where entire sectors were shaken up by innovation, and once-unassailable dominant players were quickly overtaken.One can think of cellphones, where Motorola was king in the 1990s, cornering nearly a third of the market. In the 2000s, BlackBerry took its place for a short while, until Apple’s iPhone was launched and became the new market leader. Today, that dominance is again being challenged, this time by Samsung.
Not only can the number of players active in any given market change; the market shares of each firm can also shift as innovation changes the landscape. Clearly, “number of players” should not be the central criterion upon which competition policy is based.
But the government’s fixation on the number of players in a given market as the only measure of competitiveness isn’t just ineffective; it’s also detrimental to the growth of the Canadian economy.
The benefit of the current efficiency criteria – the one the Trudeau government is looking to remove – is that it helps Canadian firms remain competitive in an increasingly global market.
Some firms have, in the past, elected to merge together as they found enough economies of scale to make them more competitive in a global environment. This means lower costs, which can then be passed onto consumers in the form of more competitive prices as part of a strategy to acquire new market share.
In the current Canadian context, where the per-person size of our economy has shrunk in real terms, any measure that makes it harder for firms to remain competitive will only hasten our decline.
What competition policy can do is look at the many existing regulatory barriers that make it more difficult for a producer to enter the market. These can be due to anything from Canadian content and ownership regulations, all the way to government-imposed quotas restricting the supply of goods such as dairy, eggs and poultry.
The less expensive it is for newcomers to enter a market, the lower the estimated profit they need for it to be worth the cost, and the harder it becomes for established players to use their market position to extract abnormal profits.
Unfortunately, Canada’s provincial and federal governments are notorious for putting up hurdles to newcomers in various markets. It is estimated that between 22 and 35 per cent of our sectors of economic activity are subject to competition-restricting legislated barriers to entry.
If politicians want to stimulate competition, they should start by removing the shackles that make it more difficult, and sometimes impossible, for new players to emerge.
Source: The Globe and Mail
