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October 8, 2021

From: Daniel Schwanen

To: The Incoming Canadian Parliament

Date: October 8, 2021

Re: Reform of the Competition Act

Parliament will be considering, in due course, reforms to Canada’s Competition Act to modernize it for the digital age.

This is welcome, as long as it does not create greater barriers to investment and innovation in digital technologies.

Many commentators bemoan the market power of large companies operating in the Canadian marketplace. They have focused in particular – though far from exclusively – on big US-based Internet companies. In Europe, these entities will now be regulated by a special ex-ante – prospective – regime that applies only to them. And meanwhile, there are US calls that these firms be broken up.

However, there are no reasons to think that adopting similarly sweeping approaches would actually result in a more competitive Canadian marketplace, relative to modernizing the application of our current competition rules, and better resourcing those who have to apply them.

The market power of firms at the top has indeed increased across many industries and nations, according to the IMF. It points the finger at a series of mergers and acquisitions, particularly in technology-intensive sectors that can reap benefits from data- or R&D-based economies of scale and of scope, as drivers of increasing market concentration.

Policymakers are rightly worried that this trend can suppress business dynamism, which could translate into lower innovation and higher prices.

But it is not evident a priori that such negative impacts obtain in any given market in which a large company, or a few large companies, may operate. First, size may be a function of network economies – of the efficiency with which data-driven firms are able to provide tailored services to their customers, the so-called “mass customization” effect. This is not bad for customers – or for suppliers seeking to offer their goods and services on electronic marketplaces or social media platforms. In general, in a time of rapid technological change, innovation is  compatible with competition between a few large innovators at the technological frontier.

Conflating the size or technology-driven nature of companies with market power, and assuming that market power will be abused, or assuming that “tech companies” are all the same, when in fact they each operate under quite different business models, should not take the place of a rigorous understanding the state of competition in a particular market in which Internet-based companies operate in competition with others.

The US Federal Trade Commission was recently spanked about this when its complaint about abuse of dominance by Facebook was rebuffed by a judge because the FTC had not been able to define the market over which the company was accused of illegal monopolization

Indeed, critics have often tended to highlight only the role that digital players occupy in the digital space, which exaggerates their overall market share.

Retail is a case in point.

Amazon clearly is the leader in the North American e-commerce realm, but e-commerce itself only ever reached about 16 percent of the overall retail US market at the height of pandemic-related closures in 2020. Statistics Canada data shows that the share of Canadian-based retailer’s sales accounted by e-commerce hovered just below 10 percent in the early days of the shutdown, settling down to about 7 percent recently. The foreign share is about the same, which leads to estimates that, overall, traditional retailers are expected to have an 86-percent market share in 2022.

Even so, digital technologies are becoming ubiquitous and less expensive, and every firm becomes digital, as technology assists in better understanding customers, managing supply chains, enhancing logistics, and facilitating omnichannel modes of delivery For example, traditional retailers now offer their products online and delivery to consumers, and new business models like Shopify have emerged to help smaller firms connect directly with customers.

Canada should make sure it assesses alleged anti-competitive behaviours on their merits, using a relevant definition of the market encompassing all those that provide similar goods and services, and taking into account dynamic factors such as the likely continued emergence of new business models and techniques.

If companies, digital or otherwise, engage in anti-competitive behaviours, including by engineering mergers to take out viable competitors, the Competition Bureau has the authority to deal with it. If markets become more complex because of digitization, then more resources or the use of novel techniques, such as AI, to ferret out questionable behaviour, are welcome.

But in this age of rapid technological advances, a singular regime focused on ex-ante regulation of the activities of large foreign tech-driven companies is misplaced, potentially limiting the growth of tech-driven Canadian companies themselves. The principal obstacles for Canadian companies to grow in the digital space are slow technology adoption by smaller businesses, and the difficulty of recruiting skilled personnel. If governments want to promote thriving companies and a highly competitive and innovative environment, these are the issues to prioritize.

Daniel Schwanen is Vice-President Research at the C.D. Howe Institute.

To send a comment or leave feedback, email us at blog@cdhowe.org

The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.