Balancing regulation and competition
Competition is good for both businesses and consumers. It strengthens businesses’ ability to adapt and provide valuable goods and services to the marketplace. It provides consumers with competitive prices, product choices, and the information they need to make informed purchasing decisions. And it balances the complex interactions of consumers and businesses in a way that serves both the public and private interest.
Here at the Competition Bureau (Bureau), we advocate that governments and decision‑makers should consider the effects that regulations have on competition. We believe that regulation should be used only where market forces will not achieve policy objectives and, even then, only to the extent necessary to address those objectives. Our perspective is based on decades of economic research, and is consistent with international best practices. But what does this mean for regulators running lean operations with tight budgets, who want their regulations to be as effective as possible? How can this be translated into practice?
There are regulations of all kinds across the federal, provincial, and municipal levels in Canada. Some of these cover important public safety issues, like ensuring that people wear seatbelts. Others have a more direct impact on Canadians’ lives as consumers, and affect the prices and quality levels of products in the economy. This article focusses on regulations that affect the economy, and provides practical guidance to regulators to ensure that legitimate policy objectives are met, while at the same time providing maximum scope for market forces to allow the benefits of competition to be achieved.
In all sectors of the economy, regulation should only be put in place when there is good evidence to show that, without regulation, policy objectives will not be met. Empirical evidence that demonstrates how the benefits of regulation will outweigh the cost to consumers is the best evidence in most cases. We discuss the role of empirical evidence as the backbone of effective regulation in our recent Report on Advertising Restrictions.
We recognize that setting up systems to collect and analyze marketplace data takes time. In the interim, however, regulators can apply international best practices when reviewing existing regulations or creating new rules.
Two international agencies have published guidance that can be helpful for regulators to understand what we mean when we talk about tailoring rules to provide for greater competition. The OECD has published a three volume Competition Assessment Toolkit, and the International Competition Network has published a set of principles for pro‑competitive regulation in its Recommended Practices for Competition Assessment. The following four key principles, drawn from these resources, can help guide regulators to minimize any negative or unintended effects of current or new restrictions on competition:
- Regulation should only address legitimate policy concerns. Regulation that affects the prices, output or quality of products should be limited to circumstances when market forces cannot satisfy policy concerns. Regulation should not be designed to meet other goals, such as ensuring that industry participants earn a certain level of income, or that consumers can purchase products at low prices. Market forces are the best way to determine how products should be provided, and should be deviated from only in exceptional circumstances where there is documented evidence that market‑based competition would run counter to a regulator’s policy objectives.
Example: During the winter of 2013‑2014, propane prices in some areas of Canada skyrocketed. The Ministers of Natural Resources and Industry asked the Bureau and the National Energy Board to investigate the causes of the exceptionally high prices. Some industry observers called for governments to regulate propane pricing to protect consumers from high heating costs. The Bureau opposed such measures in its joint report with the National Energy Board, noting that short term price spikes can incentivize producers to bring additional supplies to market. If regulators had imposed price controls, then this important market mechanism could not have functioned. Ultimately, prices returned down to normal levels, and Canada has not seen such large price spikes in the two winters since.
- Regulation should be based on the best available evidence. While industry experience can be necessary to frame the relevant issues for regulation, only empirical evidence can objectively measure what is occurring on a broad scale across consumer groups. A key role for regulators, therefore, should be the collection and preservation of marketplace data in order to ensure that the best possible evidence is available to assess regulations.
Example: In early 2014, the CRTC commenced a review of its regulatory policies surrounding wireless telecommunications in Canada. As part of this debate, the Bureau and other parties invested in, and relied heavily on, empirical evidence to support claims about the roles of regulation and competition in this important sector of the Canadian economy. Doing so provided real‑world data that the CRTC used in deciding upon its ultimate regulatory framework.
- Regulation should be proportionate to the associated harm. Regulation should be cast narrowly to preserve the greatest possible amount of market‑based competition. Regulation that goes too far can have negative and unexpected results on the industry. Minimal regulation allows policy objectives to be fulfilled, and provides maximum scope for market forces in regulated markets.
Example: In 2015 and 2016, the City of Ottawa reviewed its existing Taxi regulations. Prior to this review, the number of taxis on Ottawa’s streets was strictly limited through a quota system. During the review, the City of Ottawa indicated that its three guiding policy objectives were:
- public safety;
- accessibility; and
- consumer protection.
Inspired by, amongst other things, the Bureau’s Taxi Regulation White Paper, the City opened its Taxi regulations to allow newer forms of competition. In doing so, the City recognized that limits on the number of taxis are not strictly necessary when other regulations can address the City’s policy objectives.
- Regulation should be regularly reviewed to reflect market conditions. The Canadian economy remains in a state of perpetual change. Disruptive business models and technological advancement bring forth vital new forces that can redefine our experience as consumers. It is important that regulations keep up with this rapid pace; otherwise, there is a risk that timeworn regulations can negatively affect new ways of doing business.
Example: Following severe delays in the shipment of grain by rail during the winter of 2014, the Government of Canada issued an Order in Council directing Canadian railways to move a specified amount of grain per week. This order included a "sunset clause", whereby the order would expire on a set date unless further action was taken by the Government of Canada. This measure required regulators to re‑assess the state of grain transport to ensure that the regulatory measures remained relevant at that later date. Sunset clauses were endorsed by the Bureau in our submission to the Canada Transportation Act Review Panel as an effective way to ensure that regulations are reviewed on an ongoing basis.
The Bureau recommends that regulators should consider these principles for effective regulation. Regulators can limit the risk of their rules having unintended consequences by using evidence‑based assessments to tailor regulations in a proportionate manner, and by reviewing existing regulations on a regular basis. Doing so will further enable the forces of competition to ensure that the Canadian economy continues to deliver the highest quality goods and services at the lowest prices.