Populism, Public Interest and Competition

Speech

Speech by John Pecman, Commissioner of Competition
C.D. Howe Institute, Toronto, 67 Yonge Street, Suite 300
Friday, April 27, 2018, 12:00 pm to 1:30 pm

Introduction

Thank you for the opportunity to be here. It’s my second time at this roundtable luncheon, actually, so I must have done something right the first time. I have to be honest, when I started working at the Bureau almost 35 years ago, I never envisioned myself standing before a group of people talking about the pitfalls of “hipster antitrust”. In fact, I never thought that I would take part in any conversation that involved the words “hip” and “antitrust” being used in the same sentence—and neither did John Grisham, the best-selling author who, in his book “The Street Lawyer” described anti-trust as “hopelessly dense and boring.”

And when I refer to hipster antitrust, what I am talking about is the idea that public interest considerations—ranging from impacts to democracy and culture to inequality and industrial policy—should be injected into competition enforcement. This approach is gaining further support with increasing concerns—and I may even say “fear”—regarding big data.

As many of you know, the Competition Bureau has been actively engaging on these issues over the past year. So let me shed some light on big data, and share our views on the so-called hipster antitrust approach. And then let’s talk about what competition can and should do to support innovation.

Big Data

Let’s start with big data. Advancements in information technology have led us into the age of data and toward what is an increasingly data-driven economy. Along with this has come concern about how big data is being used—or perhaps misused—by some of the largest companies in the digital space. These concerns have given rise to a very lively and passionate discussion about what should be done about it. I think it goes without saying that big data has become the “issue du jour” and there is a considerable amount of angst surrounding it—particularly as it relates to the tech giants that have become household names.

Big data represents big promise: the opportunity for the creation of innovative products and services that improve consumers’ lives. Google is an obvious example of this –from g-mail, to its android operating system, to its smart home devices such as Google Home and the very search engine itself. Did I mention they are also presently working on an automated vehicle? These types of innovations have transformed Google, and other tech firms, into some of the largest companies in the world.

However, many have expressed concern about their ever-increasing size and market power, as was noted recently by the Senior Deputy Governor of the Bank of Canada.

Again, this fear is not without precedent. Throughout history, there has been a compulsion to equate “bigness” with “badness”, and so-called big data has been no exception to this rule. Over a century ago, during the second industrial revolution, when electrification and railroads were the innovation of the day—providing the infrastructure that facilitated the growth of corporate titans—these same concerns arose over substantial increases in industry concentration. And not just concentration, but the rise of conglomerates who were active in multiple unrelated businesses. Just as we find today with Amazon online retail, Amazon cloud services, and Amazon’s activity in grocery (Whole Foods). Some say that in the early 1900s these concerns turned Teddy Roosevelt into a ‘trust-buster’. Indeed, Roosevelt benefited greatly from the popular angst about big firms and was skillful in channelling that angst into policy that espoused modern and somewhat progressive antitrust thinking. Roosevelt said in his 1902 State of the Union Address “We draw the line against misconduct, not against wealth. The capitalist who, alone or in conjunction with his fellows, performs some great industrial feat by which he wins money is a well-doer, not a wrongdoer, provided only he works in proper and legitimate lines.”[i] And so it seems that Roosevelt, the revered trust-buster, was not concerned about size or breadth, but rather whether a company was engaging in harmful anti-competitive conduct. His work also demonstrated that populism and popular angst can be channelled into effective public policy if a thoughtful, evidence-based and measured approach is adopted. Indeed, as Roosevelt envisioned, where technology companies engage in anti-competitive acts, the Bureau does not hesitate to investigate and take action where there is evidence of competitive harm.

Enforcement

It’s important to acknowledge that the term “big data” may be new, the phenomenon itself is not. Firms have been compiling and using data for years—for example, Dunn & Bradstreet which sells data about companies, started in the mid-19th century[ii]—and competition agencies have dealt with data on numerous occasions.

The Bureau is no exception. We have been active in big data related cases for years, dating back to the A.C. Nielsen case in 1995[iii], in which the Bureau alleged that Nielsen contravened abuse of dominance provisions by restricting competitors’ access to scanner data, thereby preventing new entrants from accessing the market. Since that time, the Thomson - Reuters merger, as well as our more recent case against the Toronto Real Estate Board for restricting access to MLS data, have both dealt with big data-related issues. Big data enforcement remains an important and topical subject, and while the underlying concepts may not have changed, we know that the frequency with which we will encounter these issues is likely to increase.

For this reason, the Bureau is actively engaged in the debate and continues to provide transparency about our thinking. Since the Fall, we have released two documents on this topic—a white paper and a synthesis document. These internationally award-winning papers, and our related consultations, have helped us develop our own internal thinking and advance the public discourse.

Our analysis of big data has led us to conclude that the key principles of competition law enforcement remain valid in big data investigations. In other words, the existing competition enforcement framework is up to the task of addressing issues that arise in big data investigations. Let me expand on that a bit—competition law enforcement is evidence based. What this means is, if competition is being harmed in the marketplace, we will take action. Conversely, if competition is not being harmed, we won’t. In other words, what we won’t do is take enforcement action based solely on mere theories of long-term potential harm to competition—perhaps derived from a fear about the “bigness” of a firm. We know that this could cause more harm than good. Now, there are elements of competition law enforcement that involve predictive analysis. But we will always ground our decisions to take action in hard facts supporting the potential for competitive harm.

Consider the anxiety that algorithmic collusion has elicited[iv] among some within the competition community[v] - I am speaking specifically here about the idea that algorithms will at some point collude without any human involvement. I think it’s unwise for competition authorities to take steps to curtail businesses’ use of algorithms based on a potential concern, especially in the absence of empirical evidence to suggest that concern is merited. And investing time investigating theoretical algorithmic collusion means moving scarce resources away from other areas where we know there is harm being done to the economy.

Whether justified or not, the fact remains that consumers continue to be concerned about the rise of big tech companies. This is sometimes tied to the level of concentration that exists in the marketplace. But it is more often tied to factors other than antitrust—take for example Facebook’s data being mined by 3rd parties with perhaps less-than-benevolent interests. This recent revelation has spurred House of Commons hearings in Canada and congressional hearings in the US, as well as an investigation by Canada’s Privacy Commissioner. Undeniably, the big tech firms are big firms. But they are not big in a way that is historically unprecedented. At the end of 2007, Exxon Mobil was one of the largest US firms and comprised a little over 3% of US GDP. At the end of 2016, Apple was the biggest US firm and comprised about 3% of US GDP[vi]. So I think it is fair to say that size is not the only thing that matters. Clearly, what also matters to people are fears about whether the behaviour of these big firms is bad for society—the thinking that small, independent retailers cannot survive in an Amazon world, or that Facebook is undermining democracy, or Google is trampling our privacy rights, or, more generally, that technical innovation itself is exacerbating inequality. These may be valid concerns—but they are not all antitrust concerns.

Public Interest

A lot of these concerns have been humorously coined “hipster antitrust”. But it’s not just a bunch of plaid-wearing, craft beer drinking, 30-somethings who are making these claims. Articles from news outlets like the Washington Post and the New York Times have echoed these calls, with headlines proclaiming that monopolies represent an existential threat to democracy, linking declining competition to deepening inequality and calling for changes to antitrust legislation. Both the Harvard Business Review and The Economist appear to have taken up the cause, arguing that changes to competition law are needed to address the “data economy”. Perhaps most notably, the US Democrats have made expanding merger reviews to include public interest considerations a key part of their “Better Deal” platform[vii].

I want to be clear that my intent is not to diminish the legitimacy of public interest concerns—indeed issues like democracy, privacy, and inequality are fundamentally important and unquestionably need to be addressed to build a fair, just and successful society.

The right question is whether antitrust is the appropriate tool to remedy social issues like inequality and unemployment. And I am greatly concerned by any suggestion that competition law should transition away from an economics-based, consumer welfare standard toward a value-based public interest standard. The rationale for my concern is simple: competition law is most effective when it operates with clear and objective criteria and injecting public interest concerns into competition law prevents that from happening. Moreover, doing so injects politics into the process and politics, as we know, is best left to the people we elect to do that job—politicians. Competition authorities—as unelected bodies—are particularly unsuited to making value judgments; in fact, it’s the very antithesis of our role, which is to perform objective, rigorous analysis. There are other policy instruments that are far better suited to addressing social and cultural objectives.

There are also very good models for how to achieve this without requiring competition authorities to undertake value judgments that they are not trained, equipped or suited to do. For instance, the German competition authority, the Bundeskartellamt examines only competition issues and its legislative framework establishes a strict separation between competition and non-competition issues. The framework, however, also enables the government, through its Minister of the Economy, to overturn merger decisions on the basis of public interest considerations, provided that it is done in a justifiable and transparent manner. This “safety valve”, as it is called, is by design meant to only be used in exceptional cases and accordingly, it happens very infrequently—only nine times since the provision was enshrined in law in 1973.[viii]  This approach recognizes that public interest concerns sometimes take precedence, but provides a far better model for addressing those concerns. It removes value-based assessments from an unelected enforcement agency and places them, appropriately, with the government that is directly accountable to the voters it represents.

Legislators have a tough job, balancing multiple—and often competing—interests. But it is extremely important that they not act reflexively in their response to these interests, using competition enforcement as the cure-all for society’s ills. They should, as Teddy Roosevelt did, leverage the public pressure constructively—to craft thoughtful and effective public policy.

Efficiencies

"Now I've just spent a lot of time talking to you about what competition authorities should not be doing, I want to turn your attention to what they should be doing. But before I do, and in that same vein of what agencies, legislators and regulators should be doing, I am sure that you are aware of the recent Supreme Court of Canada decision in Comeau. The Bureau has been monitoring this case closely. While the Supreme Court has provided clarity regarding the rules on interprovincial trade, I believe that legislators and regulators should continue to examine laws and regulations to ensure that they are crafted in a way that achieves public policy objectives without unduly restricting competition.” At the outset of my speech, I talked about big data as an example of innovation—and you know, sometimes I dislike using that word because it feels like we can’t go through a day without hearing it. But this is not news to any of us. As I’ve said in the past, we are—across the globe—in the midst of what I like to call the great innovation conversation. And there are a number of good reasons for this—innovation holds the key to economic success in the short term and the long term. It facilitates the creation of better products and services, enables firms to reduce costs and increase productivity, and is key to inclusive growth in the rapidly evolving digital economy. In short: it’s good for business and good for consumers.

So naturally, everyone—from legislators and policy-makers, to the media, to academics, wants to talk about innovation and how to breed it—in our boardrooms and in our classrooms. And we talk about doing this through things like attractive tax policy, building superclusters, direct investment and skills training.

My role in this is to make sure that competition—one of the most critical contributors to innovation—doesn’t get left out of the conversation. Competition and innovation are inextricably linked—competition drives innovation. Without competition from rivals in a dynamic marketplace, what would drive companies to improve? How is the “next Google” going to unseat the current Google if not through competition?

There is considerable evidence that underscores how critically important competition is to innovation, economic growth and prosperity for all. And so, I believe firmly that it is my job, and the job of my colleagues at the Bureau to strive not only to ensure that competition is part of the conversation, but to ensure that our enforcement framework is best positioned to support innovation.

As I have said previously, this is generally the case. But there continue to be areas of our legislation that are harmful to competition, innovation and ultimately to the Canadian economy.

I am, of course, referring to section 96 of the Competition Act—the efficiencies defence.

I have made no secret of my belief that, unlike innovation, the efficiencies defence is bad for business and bad for consumers. It is also out of line with the approach being taken by many of our country’s major trading partners, including most notably, the United States.

Our decision in Superior/Canexus is indicative of this. We worked closely with our U.S. counterparts on this merger review, both reaching the conclusion that the merger was likely to have anti-competitive effects; namely, higher prices and less choice. Our approaches, however, vastly differed—the U.S. could and did challenge the merger under their law, which requires claimed efficiencies to be passed on to consumers, making consumer welfare a primary concern. The Bureau, on the other hand, did not challenge the merger, owing to section 96.

This approach sees Canada accepting reductions in competition in exchange for static and short-run fixed cost savings, which may or may not come to fruition post-merger—and I’d like to expand a little further on why that’s a problem.

In the 1960’s, economist Harvey Leibenstein brought us the concept of x-inefficiency[ix], which tells us that firms that are not spurred to innovate become complacent and inefficient—and this has been borne out in the 50 years since then. We know that it is competition—and the opportunity to become a leader—that is forcing innovation and efficiency. And let’s be clear, innovation isn’t just a better paint roller, it’s about process and best practices. Take for example modern accounting principles, arguably one of the greatest innovations of the 19th century. It was born directly from competition between railroad companies as they struggled to outdo each other in terms of efficiently running and controlling very large organizations.

There is considerable public evidence that firms not subject to competitive pressure become very inefficient and fail to innovate.

Let’s look at a Canadian example. We in Canada have become quite proud of our comparatively nascent wine industry and with good reason—Canada’s vintners make a high-quality product that is in demand throughout the world. But this has not always been the case. Prior to the 1987 Canada U.S. Free Trade Agreement, Canada’s wine industry had been insulated from competition and not surprisingly, not up to the challenge of competing internationally[x]. The FTA put an end to that protection, forcing growers to innovate or close shop. The result: a dramatically altered and highly competitive industry boasting innovative and unique products and entirely new lines of business such as tourist attractions[xi]. This, coupled with the establishment of VQA standards, has led Canada’s wine industry to a strong reputation internationally—and is a perfect case study of how competition drives innovation. This also means that I can now enjoy some great local wine from the Niagara region, where I grew up!

So, I’ve left you with a lot to digest—and I want to make sure we have some time to unpack it in the Q&A.

But let me leave you with one more thought: knowing what we do about the inextricable link between competition and innovation, the question we should ask ourselves is this—why are we exchanging what evidence has demonstrated are hugely important gains from dynamic competition for the “small potatoes” of static improvements in efficiency? While there have been some arguments in favour of this approach—including a recent C.D. Howe paper[xii] which argued that allowing firms to achieve short-run, static efficiencies under section 96 is critical to innovation—they fail to acknowledge the dynamic efficiencies that are brought about by competition, which dwarf these section 96 efficiencies.

Furthermore, the creation of market power in certain sectors of the Canadian economy as a result of the efficiencies defence is without question raising the costs of key inputs for firms operating in Canada, including exporting sectors of the Canadian economy that rely on competitively priced inputs to compete internationally. Believe me, there are many more companies that complain about facing market power and higher costs than there are merging parties touting fixed-cost savings.

In a powerful obiter in the Supreme Court’s Tervita decision, Justice Rothstein noted that the case did not appear to reflect the policy considerations that Parliament likely had in mind in creating the efficiencies defence. Based on my 34 years’ experience, I can tell you that this rationale extends to cases beyond Tervita.

As far as I am concerned, we need to be careful not to be penny wise, pound foolish when considering the impact of mergers on the Canadian economy and it’s high time we reassess the desirability of the efficiencies defence to promote an innovative and competitive economy, especially in regard to international competition. There are considerable benefits to be realized for the Canadian economy and those that participate in it, by bringing our approach to efficiencies in line with that of other modern competition enforcement agencies. It is my sincere belief that Canada should move forward with doing so.

With that, why don’t we move on to the Q&A? I look forward to our discussion, and if that goes well, perhaps I can expect a third roundtable luncheon invite!

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[i] http://www.presidency.ucsb.edu/ws/index.php?pid=29543

[ii] http://www.dnb.com/ca-en/about-us/company/history.html

[iii] Director of Investigation and Research v. D&B Companies of Canada Ltd (A.C. NIELSEN) (1994).

[iv] https://www.economist.com/news/finance-and-economics/21721648-trustbusters-might-have-fight-algorithms-algorithms-price-bots-can-collude

[v] https://globalcompetitionreview.com/article/1144015/whish-urges-restraint-on-algorithmic-collusion

[vi] FT 500—2007 and 2017

[vii] https://abetterdeal.democraticleader.gov/crack-down-on-abuse-of-power/

[viii] https://one.oecd.org/document/DAF/COMP/WP3/WD(2016)3/en/pdf

[ix] https://msuweb.montclair.edu/~lebelp/LeibensteinXEffAER1966.pdf

[x] http://www.csls.ca/reports/csls2008-3.pdf

[xi] https://www.ic.gc.ca/eic/site/cprp-gepmc.nsf/vwapj/Compete_to_Win.pdf/$FILE/Compete_to_Win.pdf

[xii] https://www.cdhowe.org/public-policy-research/promoting-innovation-and-efficiency-streamlining-competition-reviews


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