Competition Bureau should support actual competition in the market

There’s been a lot of talk about competition in Canada lately. The Competition Bureau, the federal law enforcement agency that regulates markets in Canada, tried twice to block Rogers Communication Inc.’s $20 billion takeover of Shaw Communications Inc., which was approved by the federal government on Friday.

Then there’s the Royal Bank of Canada’s proposal to buy HSBC Bank Canada for a reported $13.5-billion, which, according to many observers, the Competition Bureau will likely challenge as well.

These two recent high-profile mergers in telecommunications and banking have raised questions about the Competition Bureau, an agency most Canadians know nothing about, and competition policy in Canada more generally.

When deciding whether to approve a proposed merger, the Bureau considers a) whether the merger will significantly reduce competition or b) whether the benefits—namely increased profits from efficiency gains due to the merger—outweigh the broader economic harm from any reduced competition. This second criterion is called the “efficiency defense.”

Matthew Boswell, current head of the Competition Bureau, wants to essentially eliminate the efficiency defense so the Bureau (or any other competition policy authority) considers any prospective efficiency improvements as just one factor when evaluating mergers and not necessarily a determining factor.

If this happens and Boswell gets his way, what will it mean for future prospective mergers in Canada?

In short, it will introduce more uncertainty into the merger review process because the weight given to potential efficiency improvements will likely vary depending on the merger. It may also vary based on the background and priorities of specific regulators including members of the Bureau. And this added uncertainty might discourage corporate reorganizations that would ultimately improve the productivity performance of the economy and potentially the living standards of Canadians across the county.

But if more competition is the goal, reformers should look at legal and regulatory barriers, particularly barriers to entry by foreign-owned firms across multiple industries including telecom and banking, that discourage competition. Eliminating barriers to entry would help ensure that any cost savings associated with merger-related efficiency gains are passed through to consumers in the form of lower prices and/or improved product quality.

Unfortunately, governments in Canada have implemented numerous laws and regulations that stifle the competitive entry of both foreign and domestically-owned firms into a range of Canadian industries. A recent study published by the Fraser Institute estimates that approximately 22 per cent of Canada’s economy is protected to a substantial degree from competition by government-imposed barriers to entry.

Clearly, any serious discussion about how to promote a more competitive Canadian economy should include eliminating laws and regulations that protect incumbent producers from would-be competitors. And ironically, such an initiative would simplify the Competition Bureau’s job by reducing concerns that merger-related efficiency gains will exclusively benefit shareholders and not consumers and workers who are affected by proposed mergers. By making it easier for competitors to enter the market, regulators would make many large mergers less “anti-competitive,” thereby reducing the relevance of prospective efficiencies and reducing the reliance on government—rather than markets—as the main protector of consumer welfare.