Competition and Growth Summit 2021 — My Remarks

Today, I participated in an annual conference hosted by the Competition Bureau, Canada's regulatory agency for competition policy. It was the second day of the conference, and the general themes are laid out below. I have included my opening remarks and other notes for those who are interested. I will post the link to the recorded event once I have it.

Panel 2 – Competition and government agendas

Competition is only one of many goals policymakers must balance in the design and implementation of effective policy. The panel will discuss the levers available to governments to increase the competitive intensity of their economies, and how governments can incorporate a competition lens in their policymaking while also meeting other critical objectives. Some of the key questions this panel aim to address include:

· How does competition intersect with other public policy objectives? Has the pandemic shifted these intersections?

· What levers can governments use to increase competitive intensity post-pandemic?

· What barriers do governments face in delivering on competitive markets?

Moderator:

· Francis Bilodeau, Senior Assistant Deputy Minister, Strategy and Innovation Policy Sector, Innovation, Science and Economic Development Canada

Panelists:

· Melanie Aitken, Co-Chair, Competition, Antitrust and Foreign Investment, Bennett Jones (US) LLP

· Senator C. Deacon, Senate of Canada

· Denise Hearn, Co-author, "The Myth of Capitalism: Monopolies and the Death of Competition"

· William B.P. Robson, Chief Executive Officer, C.D. Howe Institute

Hearn Opening Remarks:

· Thank you for having me. I would like to situate us in a historical moment of crisis and post-crisis that, I believe, is informative for our current context.

· In 1945, following the remarkable devastation of WWII, the Allied forces gathered together to agree on a reconstruction plan for Europe -- and for Germany in particular. One of the key pillars of German reconstruction was decentralizing the highly cartelized economy which had, in part, helped undergird the Nazi regime’s rise to power and its centralized control. Article 12 of the Potsdam Treaty of 1945, stated: “At the earliest practicable date, the German economy shall be decentralized for the purpose of eliminating the present excessive concentration of economic powers as exemplified in particular by cartels, syndicates, trusts and other monopolistic arrangements.”

· Competition was seen as the best way to prevent the concentration of political and economic power in rebuilding post-war Germany. There was a recognition that fair and democratic markets result from intention and vigilant guardianship.

· In the intervening time, however, we have forgotten and ignored that institutionalized knowledge. An intellectual capture beginning in the 1970s and 80s incepted the dangerous idea that markets are esoteric, almost mystical entities that exist outside of public governance. But markets are not metaphysical, they are public institutions structured by politically-determined rules. All markets have rules, the only question is what those rules are and who sets them.

· Under the mantle of deregulation, we abdicated rule making authority for markets away from democratic institutions, giving it to the largest, most powerful, and most politically connected firms. In the vacuum of democratic oversight, these firms took up the mantle — often writing market rules in their favor.

· This has been detrimental for all of us.

· We are clearly not in a post-war scenario, on the heels of a horrific fascist regime, but we are experiencing an economic crisis unlike anything the world has experienced previously. Covid-19 has reminded us of the fragility of a system that is highly monopolized, as we’ve seen supply chain disruption across numerous industries. Covid has reminded us of the risk that monopolized systems pose to a nation’s sovereignty, economic prospects, and to the health and safety of its populace.

· Canada has often welcomed industry concentration under the guise of geopolitical competitiveness, despite a lack of evidence that this strategy has worked. In fact, Canada ranked number 8 on the World Economic Forum’s Global Competitiveness Report in 1999. Today, it is 14. Canada has become less globally competitive over time.

· We also know that Canadian industries are becoming increasingly concentrated. According to a 2019 report by Yelena Larkin and Ray Bawania, this is evident in three ways:

o Large firms have become more dominant, and the number of TSX publicly traded firms has dropped.

o Firms in industries with the largest increases in product market concentration started to generate higher profit margins.

o The volume of M&A deals, and particularly horizontal deals, has increased.

· They attribute these changes to an increase in market power that stems from weak antitrust legislation and enforcement, and increasing barriers to entry.

· Numerous data now show that concentration leads to a number of negative effects on economic and social health, including: stagnant growth, lower productivity, lower wages, lower business dynamism, higher consumer prices, and higher inequality.

· Covid-19 has supercharged these trends, as the largest players entrench their dominance while younger or newer businesses struggle to stay afloat.

· Post Covid-19 recovery should draw on the lessons of the reconstructionists. Canada, though still battling to contain the virus, will soon enter a post-crisis state. And we need a radical reimagination of the fundamental structure of markets.

· Competition policy is a not an add-on, or side-show – it is one of the most fundamental pillars of our immediate recovery.

· Creating the conditions for fair markets, free from the abuse of dominant players, is the foundation of any functional economic system.

· Last week’s CRTC decision on wholesale rates set a dubious precedent. If at the end of a 4 year long investigation and regulatory process, our governing bodies choose to cow to industry threats and misleading economic modeling, it is a scourge on the integrity of the very institutions meant to protect the public interest.

· The easiest way to kill Canada’s long-term global competitiveness is to stifle entrepreneurship by creating and upholding skewed market conditions that favor incumbent players to the detriment of start-ups offering better services, often at lower costs.

· And when the largest fines that the Competition Bureau can apply are $15 million, and the Bureau has only successfully challenged one merger in its entire history (20 years ago)…one could be forgiven for thinking that our competition enforcement as it currently stands is not intended to meet its mandate to ensure fair markets for all Canadians, but rather to go through the motions of democratic process without producing democratic outcomes.

· The time is now to modernize our competition policy for a new era. Covid-19 has delivered us an economic crisis, and it is a chance to take bold moves. With the new budget allocated to the Competition Bureau, though there will likely need to be much more, there is a new opportunity.

· We must move away from narrowly defining competition by market share and instead look at market power and how it is wielded against consumers, suppliers, entrepreneurs, and taxpayers. And we must update the Competition Act to meet 21st century challenges.

· As the Allied forces knew over 75 years ago, economic freedom is the foundational bedrock of political freedom. To ensure fair markets for Canadians now, and in the future, we must abandon status quo paradigms and enforcement regimes.

· I say this because I love my country, and want to see it thrive now and into the future. It is time for bold action. Our economic and political freedom depend on it. Thank you.

Questions:

THEME 1: How does competition intersect with other public policy objectives? Has the pandemic shifted these intersections?

· Monetary, fiscal, and regulatory policy all come together in dynamic ways – the economy and markets are complex adaptive systems that generate unexpected outcomes (sometimes) as a result of the combination of a number of factors. But leverage points exist, and competition policy is a key leverage point.

· Pro-competitive policies are essential as part of a wide-sweeping set of recovery policy objectives. Covid-19 has supercharged many trends of concentration of both wealth and power. In January, the Canadian Federation of Independent Business on Jan. 21 suggested that over 200,000 businesses could close permanently during the COVID-19 crisis. We know that the US tech giants have done near record amounts of acquisitions in 2020, even while under antitrust investigation.[1] Private equity has large amounts of dry powder that will be used to rollup industries.

· Recent IMF research shows that indicators of market power are on the rise in advanced economies and they are predicting that this will only get worse post-pandemic, as dominant players tended to be the biggest winners.

· So when we talk about recovery, it is impossible to talk about equitable recovery without acknowledging these mechanisms of monopolization that are at play in our economy right now. Competition policy, if properly envisioned, enforced, and resourced could be one of the strongest tools in supporting a range of other policy objectives.

2. Pro-competitive policies can often be viewed to be at odds with other policy objectives. Do you agree? Why or why not?

I want to first define my version of pro-competitive policies, because I think this term is used differently by my fellow panelists to describe different aims and agendas.

By pro-competitive, I mean the focus on upholding and ensuring markets are fair arenas for competition and that we ensure that dominant players do not abuse their position in the marketplace. A key way we can achieve this is to shift away from a consumer-centric definition of antitrust and instead focus on market power and how it is leveraged against consumers, suppliers, businesses, and workers.

With that, I think that pro-competitive policies (like more merger review, higher antitrust and abuse of dominance enforcement) can intersect very well with both sector-specific regulation and, in some cases, national policy.

Just this week, JBS, the largest meat producer in the world, was hacked in a cyberattack that forced some meat processing plants in Canada and the US to shut down over the weekend. Canada’s largest beef facility has been offline for two days — and meat shortages are coming. Earlier this year a giant ship disrupted global trade when it got stuck in the Suez Canal. PPP was notoriously difficult to source, with many countries having offshored domestic manufacturing capabilities.

All of these examples demonstrate the fragility of highly concentrated systems that were built, in theory, to maximize efficiency. We privileged efficiency over other public benefits, and we now can see the consequences. Concentrated economies, just like monopolized natural ecosystems, lack resilience from exogeneous shocks...like pandemics. Systems built with little to no slack, like just-in time delivery, are being reconsidered.

Concentrated systems are now recognized as a threat to national security by the Department of Defense in the United States. They are also sitting targets of cybersecurity breaches, like JBS or SolarWinds that supplies over 85% of Fortune 500 companies in the US with its software products.

Single-source providers gouge taxpayers in critical industries like defense and aerospace engineering.

Technology companies pose new threats and we need to break up and unwind anticompetitive mergers, AND also craft sector specific regulations that deal with core issues like privacy, data protection, and content moderation and disinformation.

Competition policy is a key policy arena that undergirds other policy agendas which support innovation, widely-shared prosperity, national security, consumer and worker protection, and industrial policy.

THEME 2: What levers can governments use to increase competitive intensity post-pandemic? What are the biggest barriers to entry and expansion for SMEs?

Although we take pride in calling ourselves the land of innovators, Canada has long struggled with stagnant productivity and weak business dynamism relative to other developed countries. According to the OECD[2], Canada has the highest number of older firms among 15 other developed countries, with firm entry and exit rates waning since the 1980s. The OECD also stated that “regulatory protection of incumbents is high by international standards and arises primarily from an above-average use of antitrust exemptions.”

Traditional narratives claim that restraints on businesses come largely from policy and government intervention, when in fact, restraints often come from lack of policy and enforcement against incumbent players.

The issue here is one of gatekeeping – incumbent firms acting as gatekeepers and de facto private regulators in markets, setting terms, prices, and erecting barriers between businesses and their customers in the marketplace. Or, abusing their dominance.

In the US with my work with the American Economic Liberties Project, I hear from entrepreneurs and business owners all the time, across industries as diverse as fitness, e-commerce, entertainment, cloud storage, consumer products, and many others about how difficult it is to compete as a result of abusive and anti-competitive tactics wielded by the largest players. Even Fortune 500 CEOs with highly valuable companies find themselves in the crosshairs of copycatting, predatory pricing, and other tactics by incumbent players. Coercive or exclusionary contract terms, tying, self-preferencing, you name it. Yes, Amazon has allowed a range of new businesses to reach consumers through their platform; however, they self-preference their own products on the platform while also using third-party seller data to create copycat products at lower prices. This happens often.

Here in Canada, the large telco companies like Bell and Rogers use subsidiary brands to undercut rivals on pricing and create the illusion of competition in the marketplace. The Bureau reviews and ‘monitors’ the situation without taking action.

Innovation spending via the Superclusters and the Strategic Innovation Fund out of Innovate Canada is incredibly important, but this must also be complemented with commensurate efforts of competition policy enforcement, otherwise businesses in key industries like finance, telecommunications, grocery, healthcare, and others will fail to have adequate access to markets to credibly compete.

Friedrich Hayek wrote, “It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us, that we as individuals can decide what to do with ourselves.”

THEME 3: If there is one thing you could ask governments to do today to improve Canada’s competitiveness, what would it be?

• Move the Competition Bureau out of the Ministry of Innovation, Science and Economic Development to make it a more independent governing body (an agent of Parliament), and

• Modernize the Competition Act — John Pecman has recommended both of these and has said that Canada’s Competition Act is “probably one of the weaker antitrust laws in the world.”

Reformation should focus on:

1. Strengthening merger review

2. Rethink the efficiencies defense, which arguably laughable, given actual data of post-merger analysis. John Kwoka, a competition policy expert, analyzed over 3000 mergers and found that in mergers that led to six or fewer significant competitors, prices rose in nearly 95% of cases. And on average, post-merger prices increased 4.3%.[3] We also know that corporate mark-ups have increased dramatically in the last few decades, from 18% in 1980 to 67% today (Jan De Loecker and Jan Eeckhout). This trends with higher industry concentration levels and rising market power.

3. Merger Intelligence and Notification Unit in late 2019 to reflect enhanced information-gathering duties on non-notifiable mergers. I hope that the Bureau continues to exercise this jurisdiction and steps up efforts to examine smaller acquisitions in certain sectors. They should keep a particular eye on big players with a pattern of acquiring several smaller competitors.

4. Shifting the burden of proof away from needing to demonstrate that abuse of dominance led to a decline in competition to demonstrating anti-competitive conduct as grounds for enforcement, and

5. Updating the Act to include provisions that protect workers.

Some of these, and other, recommendations are in a new report entitled: “Reforming the Competition Act: Suggested Changes to Enhance Competitiveness and Equity of the Canadian Economy” from Robin Shaban at Vivic Research, which I also endorse.

References: [1] https://www.bloomberg.com/news/articles/2021-01-24/why-dealmakers-expect-tech-m-a-to-keep-up-its-red-hot-run [2] www.oecd.org/canada/Policies-for-stronger-and-more-inclusive-growth-in-Canada.pdf

[3] Kowka, Joseph, U.S. antitrust and competition policy amid the new merger wave, July 27, 2017 http://equitablegrowth.org/report/u-s-merger-policy-amid-the-new-merger-wave/