Yahoo Finance Opinion: Competition law should benefit consumers, not corporations
By Jeffrey Church
The House of Commons has just passed Bill C-56, which makes it easier for the Competition Bureau to find that big business has acted anti-competitively. The changes to the Competition Act are very similar to what the leader of the NDP proposed in a private member’s bill. Canadians should not be fooled into believing such reform is sensible. By reducing the incentives for companies to compete through innovation, the legislation’s actual effect may well be to protect competitors at the expense of consumers.
As the law stood, the Competition Act required the Competition Bureau to demonstrate, not only that a dominant firm’s conduct was intended to have a negative predatory or exclusionary effect on rivals, but also that it had actually harmed competition and enhanced the firm’s ability to charge prices above competitive levels, i.e., exercise market power. The new legislation requires only that a dominant firm have harmed its rivals by acting anti-competitively. And it lengthens the list of practices assumed to be anti-competitive to include “excessive” and “unfair” selling prices.
Market economies are successful because they provide companies, whether big or small, with the incentives and freedom to introduce new products and processes. The main basis of our wealth and prosperity is not textbook price competition that results in production of more of an existing good. To paraphrase and update 20th-century economist Joseph Schumpeter, who coined the term “creative destruction”: add as many locomotives and railcars as you please, you will never get an airplane by so doing. The new legislation favours imitation and entry rather than the innovation that is so clearly key to 21st-century prosperity. It doesn’t respect the classic admonishment of Justice Learned Hand, in a famous U.S. monopolization decision: “The successful competitor, having been urged to compete, must not be turned upon when he wins.”
The government should certainly be concerned about affordability, but its policies will backfire if it misidentifies the causes of rising prices. By making it an anti-competitive practice for a dominant firm to charge prices that are “excessive” or “unfair,” the legislation establishes a role for competition law in preventing the elevation of prices above competitive levels. This is contrary to the Canadian tradition that the task of controlling the exercise of market power with price regulation is properly assigned to industry-specific regulators. Market power attained by offering consumers a better deal than competitors should be encouraged, not shackled or punished — not even if some competitors go under as a result. Forcing firms whose dominance was attained by superior competitive performance to price at cost or at some government assessment of prices consistent with a reasonable level of profits clearly reduces the incentives for innovation.
Competition is about offering consumers a better deal than your rivals do. That almost certainly harms your rivals and benefits your consumers. It also means that competition law and policy should seek to sort out the effect on consumers, not always protect competitors from harm, as the new legislation does. Yes, requiring harm to both consumers and rivals before bringing the law into play may result in letting big firms get away with more anti-competitive conduct. But so be it: the harm from that sort of error is almost certainly less than doing the opposite and restricting behaviour that is often good for consumers.
Consider the iPhone ecosystem, often referred to as a “walled garden.” Apple requires that apps be installed only from its app store and it prohibits competing app stores. As a result, it can control the price developers pay to have their apps distributed on iPhones. Bill C-56 will make it much easier for the government to require Apple to allow competing app stores. But is Apple’s current conduct necessarily bad for iPhone users? Its restrictions protect users’ privacy and security, while the higher price it can charge by monopolizing app distribution is part of the prize for developing an ecosystem that has created trillions of dollars of value for consumers.
If Apple’s app revenue were to fall as a result of government action that opened the iPhone ecosystem to other app stores, its response might well be to raise the price of iPhones. With the higher app prices it can charge now, it has a greater incentive to sell iPhones by charging lower prices. Consumers, especially those who don’t use many apps, could well be harmed if government intervention forced app prices down and iPhone prices up.
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The rhetoric used to justify the new legislation is powerful: we need reform to rein in today’s robber barons, who compete unfairly, abusing their rivals. This new approach may well make it easier to bring down Apple’s and other big firms’ walled gardens and create competition within each garden where before there was none. But do we really want to do that? Bill C-56 tilts the balance towards protecting competitors and away from rewarding innovation. The likely result will be fewer competing walled gardens for Canadians to enjoy.
Jeffrey Church, professor of economics at the University of Calgary, has acted as an expert in competition policy cases in Canada, the U.S., and Europe.
