Tackling market power, which allows businesses to exploit consumers, will help alleviate the sticker shock that many of us are feeling right now.
by Robin Shaban, Keldon Bester. Originally published on Policy Options
July 6, 2022
Amid record inflation that hasn’t been seen in Canada for three decades, analysts have been considering the role that corporate profiteering may be playing in higher prices. While many factors are at play, one study estimates that 26 per cent of inflation experienced by Canadians could be driven by firms garnering excess profits through charging higher prices.
As policymakers begin to roll out responses to these inflation trends and excess profits in key sectors, the federal government has also announced a comprehensive review of the Competition Act of 1985. Beyond improving the competitiveness and dynamism of our economy, a reinvigorated Competition Act is also an opportunity to tackle market power. Market power is what gives corporations the ability to pass on these excessive prices to Canadians.
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At a recent event, Commissioner of Competition Matthew Boswell called for greater enforcement of Canada’s competition laws to combat rising prices, but Canada’s toolbox is limited relative to its international peers.
Under European competition laws, businesses can be fined for abusing their dominant position in a market to exploit purchasers or sellers. This includes imposing unfair purchase or selling prices or other unfair trading conditions. Recent cases taken by the European Commission involve Aspen, a pharmaceutical company that increased the price of off-patent cancer medicines by several hundred per cent. Another case is Gazprom, which was accused of setting unfair gas prices across Eastern Europe.
Canada has no equivalent exploitation doctrine in its competition law. It is not illegal for dominant firms to leverage their market power to earn excess profits, exploit consumers or even exploit workers.
A firm’s behaviour is deemed to be an “abuse of dominance” only if it undermines overall competition in the market. In practice, abuse of dominance typically includes behaviours that harm other businesses and prevents them from acting as vigorous competitors.
The government recently put forward amendments to the Competition Act that would extend the type of behaviours that could be deemed abuse. But even with these amendments, it would not capture exploitative conduct.
Under Canadian law, high prices are not viewed as a problem in and of themselves because they may incentivise new firms to enter the market to capture some of the excess profits. The aim of our current abuse-of-dominance laws is to enable entry of new firms.
This would be accomplished by preventing behaviours that create barriers to new competitors in a market. However, this logic assumes away the reality of structural barriers that prevent entry, such as large capital investment and, increasingly, access to large datasets on consumers and their purchases. Without the concept of exploitation in our abuse-of-dominance laws, the Competition Bureau doesn’t have the power to tackle excessive pricing head-on once market power has been established.
As part of its review of the act, the government should consider expanding the abuse-of-dominance provisions to enable the bureau to challenge exploitative prices and business terms. When it comes to curbing inflation increases, this change would be complementary to traditional monetary policy as the Bank of Canada increases interest rates in an effort to rein in inflation.
But ultimately the best way to tackle profiteering is by preventing the acquisitions of market power in the first place. Here, the act also has an important role to play through the merger control provisions.
Robustly competitive markets make it difficult for firms to charge excessive prices. The most powerful way we can keep markets from losing their competitive vigor is by preventing mergers. These remove competitors from the market and create large, dominant firms that can then use that dominance to exploit Canadian consumers and businesses.
The Competition Act is supposed to prevent mergers that make markets less competitive. However, like our abuse-of-dominance laws, our merger laws fall short of that goal. Canada’s merger laws are uniquely permissive of harmful mergers. In the more than 35 years since the act was introduced, Canada’s Competition Bureau has never won a merger case on final judgment.
Even when the bureau is able to negotiate an agreement with the merging parties, our law allows for remedies that result in a reduction of the competitive intensity. As a result, the remedies for these mergers do not fully protect competition or Canadians.
A recent report concluded that simplifying our merger laws would better enable the bureau to block harmful mergers. The added benefits would be a reduction in the complexity of merger investigations and more predictable laws.
To block a merger today, the bureau must undertake an incredibly complex analysis to predict the effects of a merger will have on the market and consumers. This process could be simplified by replacing it with a presumption against acquisitions by dominant firms. For example, the law could forbid mergers that create an entity with a market share of 80 per cent or greater.
Paired with higher standards for merger remedies, a stronger bias against mergers by entrenched incumbents would force these corporations to actually compete for greater market share rather than allow them to swallow up rivals.
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The review of the Competition Act presents a unique opportunity for us to make changes that prevent and address profiteering and exploitative business behaviour, both now and into the future. The biggest challenge we face today is mustering the courage to make bold, yet needed, reforms.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
