Report of the Advisory Panel on Efficiencies: Executive summary

In September 2004, the Competition Bureau launched national consultations on the role of efficiency gains in merger review under the Competition Act. One element of the process was the appointment of the Advisory Panel on Efficiencies. The Panel’s mandate was to assess the role that efficiency gains stemming from mergers should play in the review process, in the context of Canada’s evolving economy. The Panel was asked to consider the general economic and business implications of the current treatment of efficiency gains, and comment on the characteristics that Canadian competition policy should have to ensure that efficiency gains are properly addressed. Throughout, particular attention was to be paid to dynamic efficiency.

The Advisory Panel met regularly from January to May 2005. It reviewed the literature on the efficiency defence and on productivity in Canada. It also analyzed the treatment of efficiency gains in competition policies in other countries.

The role of efficiency gains in Canadian competition policy traces back to a 1969 Economic Council of Canada report that noted that small market size often resulted in inadequately specialized Canadian firms with short production runs. At the time, tariff barriers sheltered Canada’s domestic market from foreign competition and free trade was an unrealistic option. The Council therefore recommended that Canada’s competition law and policy specifically take into account the efficiency gains that could result from mergers that otherwise could be deemed to be uncompetitive.

The current Panel addressed its mandate by asking three questions. First, what was the Economic Council’s rationale for recommending in 1969 that efficiency gains be given specific consideration as an “offsetting public benefit”? Second, is this consideration still warranted today, given the evolution of the Canadian economy? Third, if specific consideration of efficiency gains is still warranted, what should characterize their treatment in the Competition Act?

The existing merger efficiency defence became part of Canada’s competition law when the Competition Act was enacted in 1986. Section 96 of the Act allows the Competition Tribunal to authorize a merger that has brought about or is likely to bring about gains in efficiency that “will be greater than, and will offset, the effects of any prevention or lessening of competition” resulting from the merger.

Only 35 of the more than 4000 mergers the Competition Bureau has reviewed since 1986 have come before the Tribunal, and of these only a handful have been substantively litigated. There appears to be a strong disincentive for parties to vigorously present claims about efficiency gains to the Bureau, since relying on an efficiency defence not only introduces a long and uncertain litigious process but may also be viewed as an implicit or explicit admission that a merger substantially lessens competition. The Panel concludes that while efficiency gains have not been entirely ignored, they have not been a regular or explicit consideration in merger review.

In its review of economic changes since 1969, the Panel concluded that Canada now has a very open economy, with one of the highest levels of trade intensity among member countries of the Organisation for Economic Co-operation and Development. Nonetheless, non-tariff barriers to trade still have a significant impact on productivity, and thus the Economic Council’s 1969 concerns about inefficiency are still valid, particularly for services. Therefore, competition policy can still play a role in bringing about more efficiency and innovation in the economy.

At the same time, competition policy by itself may not have a predictable and replicable impact on innovative capacity. In some cases, a merged firm’s larger scale — and the resulting higher concentration in an industry — may lead to more innovation and benefit the economy; in other cases, increased concentration may have a negative effect. A one-size-fits-all approach to enhancing dynamic efficiency through competition policy will not work.

The Panel’s mandate required it to review the Competition Bureau’s October 2004 report of the round table it held with competition law authorities from Australia, Canada, the European Union, Mexico, the United Kingdom and the United States. Officials in other countries entertain dynamic efficiency claims in merger review, but do so with caution. The Panel concluded that, although convergence of Canadian laws with those of other major jurisdictions is generally good public policy, Canada should not refrain from adopting a unique approach when the situation demands it.

The Panel, following its review, concluded the following.

• Despite significant changes to the Canadian economy, Canada still faces a major productivity problem. Thus, public policy tools, including competition policy, should all be considered to promote economic efficiency.
•  Mergers can contribute to improvements in the efficiency of firms; therefore, merger review should involve explicit consideration of potential efficiency gains.
• There may be special circumstances in which competitive market forces have not resulted in the optimal efficiency of firms, circumstances that might justify a merger that substantially lessens or prevents competition to proceed on the basis that it will produce sufficient offsetting efficiency gains. However, the circumstances in which an efficiency defence may apply, and the applicable standards, should be more clearly defined.
• An efficiency defence should not be permitted in the case of a merger-to-monopoly.

The Panel believes that Canada should retain an efficiency defence, because in rare but important cases, a trade-off between efficiency gains and a substantial lessening or prevention of competition may be justified. Both productive and dynamic efficiency gains should be considered in this analysis. In coming to these conclusions, the Panel also notes the following.

• There should be a clear, predictable and politically acceptable standard that the Tribunal applies when weighing efficiency gains.
• The current standard for weighing efficiency gains against competition effects is not satisfactory. Parliament should therefore define the standard that any trade-off would have to meet, since this is fundamentally a policy question of who should benefit from the efficiency gains of an otherwise anti-competitive merger.
• The existence of an efficiency defence, which is likely to apply rarely, should not detract from the Competition Bureau and Tribunal regularly considering pro-competitive efficiency gains when assessing the competitive effects of a merger.

With respect to the characteristics that the Canadian competition policy framework should have in order to ensure that efficiency gains are properly addressed, the Panel notes the importance of the following.

• Oversight. The Tribunal’s review function would be even more important under the Panel’s proposed framework, since the Bureau would more regularly assess claims of efficiency gains.
• Accessibility. Parties should be able to bring their claims of efficiency gains to the Bureau at the outset of a review and, in doing so, should not be assumed to be explicitly or implicitly admitting that their merger creates a competition problem.
• Predictability. Businesses and their advisors consider it critically important to be able to predict with some degree of certainty the likely outcome of a Bureau merger review.
• Assessing dynamic efficiency. While competition policy should recognize claims of dynamic efficiency gains, measurement problems preclude such claims being given special weight or time frames. The current practice of a qualitative assessment of claims of dynamic efficiency gains is appropriate and consistent with international practice.

The Panel was also asked to consider the applicability of its findings in the context of strategic alliances. Here, the Panel concluded that strategic alliances are very similar to mergers and that the regime for dealing with efficiency gains in strategic alliances should be identical to that in place for mergers.