Keldon Bester

Competition Policy Series: What Steps Must Canada Take to Address the Challenges from Digital Technologies?

The Centre for International Governance Innovation (CIGI) held its third virtual event in the Competition Policy Series, “What Steps Must Canada Take to Address the Challenges from Digital Technologies?”, on Wednesday, June 8, 2022.

The digital economy has upended competition policy and presents complex new challenges for policy makers. What challenges have been witnessed over the past few years, and what have been the implications for innovation and for society more generally? What is the role of competition policy to address these issues? Do we need greater emphasis on antitrust or on regulations to address these issues? Is greater coordination required across regulatory bodies and, if so, what mechanisms can be used to achieve it?

These and other questions were addressed by our panel of experts:

Keldon Bester, Fellow, CIGI
Denise Hearn, Senior Fellow, American Economic Liberties Project
Jennifer Quaid, Senior Fellow, CIGI
Bob Fay, Managing Director of Digital Economy, CIGI

See the full panel here.

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by Keldon Bester

Canada’s Budget 2022 Offers Competition Reforms, but the Real Fight Lies Ahead

Tucked in the middle of the Government of Canada’s 500-page Budget Implementation Act, 2022, No. 1 — Bill C-19, tabled in Parliament in April — are the first material amendments to Canada’s Competition Act in more than a decade.

The amendments follow through on Minister of Innovation, Science and Industry François-Philippe Champagne’s statement in early February about the “critical role of the Competition Act in promoting dynamic and fair markets” and his embarkation on a careful evaluation of potential improvements.

The proposed changes are indeed meaningful upgrades to the current state of Canada’s competition law, particularly its ability to protect Canadian workers, despite the lack of deliberation common to budget omnibus bills. But, while the amendments place long overdue attention on gaps in Canada’s competition law, a bigger fight lies ahead, should the government also follow through on its announcement that it would engage in a “more substantive” review of the act. If Ottawa wants to create a Competition Act that truly protects Canadians, it will need to reform the area of competition law most valuable to Bay Street: mergers and acquisitions.

Amendments to the act proposed in the budget bill expand the scope of abuse of dominance (conduct by a dominant firm with a predatory, exclusionary or disciplinary effect); clarify the prohibition on drip pricing (the practice of advertising prices that are unattainable due to hidden fees); and expand the types of conduct that private parties can bring in front of the Competition Tribunal, independent of the Competition Bureau.

Beyond these, two proposed amendments that stand out are the expansion of the act’s cartel provisions to include wage-fixing and no-poach agreements, and the reform of the law’s anemic financial penalties.

The wage-fixing change is a response to good work by the Standing Committee on Industry and Technology, in particular, of member of Parliament Nathaniel Erskine-Smith, in the first year of the pandemic. It was prompted by the major grocery companies’ apparently synchronized decisions to reduce “hero pay” for their frontline workers, and the revelation of related communication among their senior executives. This led the Competition Bureau to seek legal advice that confirmed that neither coordination among employers to fix wages nor “no-poach” agreements (agreements not to hire away competitors’ staff) were currently covered under the act.

Workers benefit when employers have to compete for their time and effort, and wage-fixing and no-poach agreements attempt to blunt that competition at workers’ expense. As University of Ottawa professor and CIGI Senior Fellow Jennifer Quaid points out, the language of the amendments leaves a number of technical questions unanswered. Nonetheless, the proposed change is preferable to a status quo in which employers have been free to suppress wages and reduce workers’ mobility, especially as Canadians see their cost of living rise across the board.

Beyond addressing wage fixing, the proposed amendments also increase the penalties the Competition Bureau can request from the Competition Tribunal for violations such as abuse of dominance and deceptive marketing. Currently, penalties are capped at $10 million for a first offence, and $15 million thereafter. The bill proposes a higher ceiling, proportional to the impact of the conduct or the size of the company. Following the reform, firms could be forced to pay three times the value of the benefit gained from the problematic conduct or, if that cannot be reasonably determined, three percent of annual worldwide revenue.

To illustrate the scope of the proposed change, in early 2020 the Bureau reached a CDN$9 million settlement with Meta over its misleading claims to Canadians about their privacy on the company’s Facebook and Messenger platforms. This settlement, although close to the existing cap of $10 million, represented less than one hour of revenue relative to the company’s total 2020 earnings of approximately $110 billion. Under the worldwide revenue method, the potential ceiling for the fine under the amended act would have been closer to $3 billion.

Unfortunately, the proposed amendments also add unnecessary complexity by introducing two tests for determining the ceiling for fines. We should anticipate legal wrangling over terms such as “reasonably determined.”

But these reforms are nevertheless a step toward ensuring penalties under the Competition Act, particularly those levied for deceiving and misleading consumers. They go well beyond what has essentially been the threat of a parking ticket for major firms.

Far more important than fines, though, is the Bureau’s ability to influence the long-term structure of markets, often defensively, in response to anti-competitive mergers. These mergers can fundamentally restructure markets, often permanently eliminating competition, reducing consumer choice and increasing prices.

Canada’s current merger law is uniquely permissive, with a so-called “efficiencies defence” that allows harms to Canadians in exchange for alleged cost savings, savings that often come in the form of job losses. Even when the Bureau successfully challenges a harmful merger, the standard for addressing those harms favours narrow solutions that allow for lost competition rather than restore competition to pre-merger levels. This leads to the pursuance of complex and piecemeal solutions rather than the simple protection of competition by blocking a merger outright.

The ongoing Rogers-Shaw transaction is emblematic of this permissiveness. Although Canadians pay some of the highest rates for wireless service in the world, and the Competition Bureau has filed an application to block the merger, commentary suggests the transaction is likely to proceed with an assumed remedy carving off Shaw’s wireless assets and providing other concessions to support the growth of a buyer. Parliamentarians, including members of the Standing Committee on Industry and Technology and New Democratic Party leader Jagmeet Singh, have correctly diagnosed the potential harms to Canadians and called on the government to prevent the transaction. But Canada’s current merger laws are designed to smooth the rough edges of harmful acquisitions, not to decisively protect competition.

Although no change to Canada’s competition law comes without controversy, any reform intended to protect Canadians’ interests at the expense of monopolies will be fiercely contested by the latter. Despite empirical evidence of the harms caused by a permissive approach to mergers, change will challenge not only the monopolists looking to acquire their competitors, but also the large financial institutions and law firms that help execute these transactions. Reform will also help mitigate the assumption that, as a relatively small population, Canadians have no choice but to bear the costs of concentrated industries. A comprehensive reform of the Competition Act is an opportunity to push back on these outdated ideas, but doing so will test the resolve of parliamentarians to buck corporate interests.

The federal government should be commended for addressing problems that competition advocates, policy makers and our competition enforcer have identified. But the bigger battle will be over areas of the law with the power to shape markets for years to come. Changes of that magnitude will need to be worked out with more democratic oversight than an omnibus budget bill. By ensuring that perspectives beyond Bay Street are considered in a more comprehensive and public review of the Competition Act, the government can make that democratic oversight truly worthwhile.

Evidence at home and abroad suggests the power of firms to extract higher profits is playing a role as Canadians see material increases in the cost of living for the first time in years. Now more than ever, Canadians need a set of laws that protect them from the consequences of monopoly.

Read the original publication here.

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by Keldon Bester

On Rogers-Shaw, Canada’s Competition Watchdog Should Heed Parliament’s Advice

Momentum is building for Rogers to offer the sale of Shaw’s Freedom Mobile business as a solution to Competition Bureau concerns about the proposed $26 billion merger of the two telecom giants. Rogers is reportedly engaging potential buyers, including the founder of Freedom’s predecessor Wind Mobile, and reports suggest the federal government is testing the interest of international players to pick up the assets.

But as we've passed the one-year mark since the announcement of the Rogers-Shaw merger, the Standing Committee on Industry and Technology (INDU) released its report following public hearings and study of the proposed transaction. Although initial reports suggested the report would advocate for the sale of Shaw’s wireless assets, the path Rogers is now pursuing, the committee’s recommendation was much stronger than expected: namely, that arguments in favour of the merger are unconvincing, and it should not proceed.

The recommendation contrasts with the open-ended statement by Minister of Innovation, Science and Industry François-Philippe Champagne on March 3, which left open the possibility for the merger to be allowed with the transfer of at least some of Shaw’s spectrum assets, potentially those previously discounted to foster wireless competition, and a complex and risky remedy focused on carving off Shaw’s wireless business.

By providing a clear path forward, the committee’s recommendation should encourage the Bureau to buck the trend of its previous action in the telecommunications sector, and truly protect Canadians.

INDU Rightly Skeptical of Proponents’ Claims
The committee’s report clearly illustrates why regulators and Canadians should be skeptical of this merger. First, the committee is aware there is no formal mechanism to hold the merging parties accountable for any promises and is doubtful the merger is required for the parties to make good on their commitments.

Regarding the incentives to make good on promises to expand services to rural communities, the committee correctly points out that “the size of a company does not change the profitability of a region.” The committee also takes issue with the competitive change of heart Shaw evidenced by reversing claims it had made to the same committee (just months before the merger announcement) that regional players such as itself were disrupting the hold Rogers, Bell and Telus have on Canada’s wireless markets. Shaw’s about-face casts doubt on not only its own claims but also those of players offering to pick up the competitive slack should the transaction proceed.

In light of this skepticism and the scale of potential harms detailed by witnesses contributing to the committee’s report, it is disappointing to not see similarly forceful language from Champagne, the minister most directly involved with the future of Canada’s telecommunications market, and under whose departmental portfolio the Bureau falls.

The minister’s formal authority is limited to approving the transfer of spectrum assets, a required input for mobile wireless service, between the parties. While his statement led with an emphasis on delivering competitive and affordable telecommunications service for Canadians, he committed only to blocking the “wholesale transfer” of Shaw’s spectrum assets to Rogers, a statement that Rogers’ newly appointed CEO considered very helpful.

This position leaves room for Rogers to acquire at least some of Shaw’s spectrum assets. Those assets could include spectrum that has been reserved by successive federal governments for smaller telecom companies in an attempt to spur wireless competition. It also suggests the minister would not take issue with a merger remedy that only forces Rogers to divest some of Shaw’s wireless business to satisfy competition concerns.

A more generous interpretation of Champagne’s statement is that he is trying to avoid any appearance of interfering with the Bureau’s analysis of the transaction and to give it a free hand in the development of remedies. But a stronger stance against the merger could, at a minimum, shift the balance of negotiation between the Bureau and the merging parties and, ideally, embolden the enforcer to pursue decisive action as suggested by the committee.

Read the full publication here.

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by Keldon Bester