Remarks by John Pecman, Commissioner of Competition

Innovation and Antitrust Workshop

Ottawa Convention Centre, Ontario

November 4, 2014

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Welcome

I’m very pleased to be here today for what is a very important discussion.

We have a great group participating in this workshop today — leaders from the business, legal and academic communities, as well as our esteemed counterparts from the US and European competition agencies.

I’m encouraged by the fact that so many of our partners and stakeholders are here to discuss, debate and share insights as to how innovation and dynamic competition should be assessed by competition agencies. I know that the discussions that take place today will better inform our work going forward.

Innovation

I would like to begin by providing some context for this workshop and discussing the role of innovation in our economy.

Innovation is a broad concept, with different people attributing different definitions to it. At its essence, innovation involves the introduction of new products, the development of more efficient production processes and the improvement of products and services. In more colloquial terms, it involves new and better ways of delivering products or a service.

I say “better” because innovation involves more than finding a new way of doing things. Having the market deem the "new way" to be "better" than the status quo is what makes innovation risky. This means that, in order to be successful, not only must our innovators have courage, vision, drive and patience, but our markets must be receptive to those efforts, which is where we, as a competition agency, come in.

The ability for customers to vote with their wallets to determine whether an innovation is desirable is what makes free markets work for the betterment of society; ensuring that resources are allocated to their optimal use.

For businesses, innovation is fundamental to profitability and growth. For governments, innovation is fundamental to a country’s productivity growth and global competitiveness. As a result, both individual firms and governments strive to create conditions that are conducive to innovation.

Economic research has shown that technological innovation is the primary driver of economic growth. In fact, growth theory pioneered by Nobel laureate Robert Solow has found that the vast majority of output growth in an economy occurs from technological progress, as opposed to increased use of labor and capital. This is an important point to consider, and I will return to it shortly.

In recent years, rapid advances in technology and communication have spurred innovation and significant change in industries that had long been insulated from new forms of competition. Here are just a few examples of this:

  • The advent of and exponential growth of Netflix has substantially impacted the traditional broadcasting landscape, resulting in rapid change to old business models. The success of Netflix has encouraged other program suppliers to bypass the traditional distribution monopolies and offer their products directly to consumers.
  • More recently, many cities across the world are witnessing the emergence of a new competitor, Uber, which is challenging the traditional taxi industry. This is one example of innovation that has been encouraged by direct access to consumers through smartphones.
  • The Competition Bureau’s recent enforcement work in the real estate industry seeks to address, among other things, exclusionary conduct that is preventing the growth of next-generation brokerage services, namely the provision of online brokerage services that challenge the current offerings in the industry.

Changes of this nature often result in regulatory and legislative overhauls and frequently become the subject of much public debate. The rapid adoption by consumers of these new ways of delivering products and services is proof of their value to consumers.

Competition and innovation

Competition between firms and the drive to innovate and to bring new and improved products to market ahead of competitors is what spurs the development of new and better products and services in the marketplace.

The underlying premise of competition policy is that a properly functioning market results in the most efficient outcome.

Anti-competitive actions, whether in the form of cartels, anti‑competitive conduct by a dominant firm, or mergers that enhance market power, may distort the efficiency-enhancing benefits of competition and must be deterred through vigorous enforcement.

In examining potentially anti‑competitive mergers or conduct, competition agencies, such as the Bureau, consider both static and dynamic aspects of competition.

Static competition typically focusses on price rivalry and takes an existing set of products, services and competitors in an industry as given. Dynamic competition embodies product and process innovation. This type of competition is especially prominent in the pharmaceutical, high-tech and telecommunications industries.

In Canada, the analytical framework for the review of mergers, competitor collaborations and business conduct that is associated with market power is often focused on price and output considerations.

It is important to understand that the Competition Act contains expressed provisions requiring the Bureau to include the nature and extent of innovation in a relevant market as a factor in its analysis of mergers and competitor collaborations.

The focus on assessing and predicting competitive effects on price and output can be attributed to the inherent difficulties associated with the measurement and quantification of innovation and dynamic competition. In contrast, the analytical and empirical tools for evaluating price and output effects are more advanced and have been accepted by courts.

In the context of mergers, our focus is generally on whether the merged entity will be able to charge materially higher prices. Similarly, when assessing conduct, our approach is generally to ask whether, in the absence of the conduct, prices would be materially lower.

In terms of innovation, the Bureau regularly examines whether conduct involving competitors, such as mergers or joint ventures, impacts the rivalry that incentivizes firms to innovate.

On the other side of the coin, competitors often claim that mergers or joint ventures enhance innovation by improving their ability to innovate. This may involve assertions that eliminating redundant R&D expenditures will allow the parties to focus their resources on other R&D projects, share best practices and pool intellectual property.

Keep in mind what I said earlier, technological innovation is the main driver of economic growth. Thus, while the market inefficiencies associated with pricing above competitive levels are clearly not desirable, and will continue to be the primary area of inquiry for the Bureau in most industries, an argument can be made that the impact to innovation, whether positive or negative, should be the predominant concern in some industries.

Given that our understanding of the effects of enforcement on innovation lags that of the effects on prices and output, competition agencies should only intervene when clearly appropriate.

This requires striking the right balance and taking a judicious, evidence-based approach to avoid chilling pro-competitive, innovative conduct while vigorously pursuing anti‑competitive activity that stifles innovation.

Innovation: not just good for business

This takes me to why we are here today.

Innovation isn’t just a critical component of success for the business community – governments and organizations must heed its call, too. The same goes for competition agencies. We must constantly challenge, innovate and, in turn, improve our investigative processes and analytical tools to ensure that we continue to promote efficiency and innovation through our work.

If one looks back on how antitrust laws and enforcement have evolved in the last century, both in Canada and abroad, it is clear that much has changed. New ideas from academics and landmark decisions by the courts have prompted legislative amendments, revised guidelines and new and better ways of analyzing business conduct.

Given the importance of innovation to economic growth, the treatment of innovation as it relates to competition is an area ripe for improvement.

Examining the right way to measure innovation and ensuring that the proper tools and methods are at our disposal are but a few of the important considerations before us today.

As we review the way in which we approach innovation and examine new possibilities, it is critical that we work with our partners, including the academic and business communities, to ensure that our future approach is sound.

There is no silver bullet here. We won’t walk out of this workshop patting ourselves on the back with a magic formula for assessing innovation. The idea is to push our thinking and reconsider our existing methods.

On that note, let’s begin the workshop. I hope that everyone enjoys the day.

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