Highlights: Competition Bureau’s innovation and antitrust workshop
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On November 4, 2014, the Competition Bureau held a one-day workshop on innovation and antitrust in Ottawa. The purpose of the workshop was to advance the discussion on how innovation and dynamic competition can inform antitrust analyses.
Approximately 100 participants attended the workshop, including presenters from the Bureau, competition agencies in Europe and the United States, and the business and academic communities, as well as attendees from various federal government agencies, the legal community and civil society.
Participants actively discussed a number of issues pertaining to how competition policy and enforcement practices can foster an economic and regulatory environment in which innovation can thrive.
B. Rationale and objectives
Innovation, which involves the introduction of new products and processes and the improvement of existing ones, is widely recognized as a key driver of economic growth and consumer welfare.
Competitive rivalry often drives innovation. However, mergers, joint ventures, strategic alliances and other business arrangements and conduct can affect competitive interactions between firms and, thereby, either promote or hinder innovation. Competition policy and enforcement practices of competition agencies therefore play a crucial role in fostering an economic and regulatory environment in which innovation can thrive.
The analytical framework for the review of mergers, competitor collaborations and business conduct has traditionally focused on price and output considerations — an approach that is well developed and has been endorsed by courts and tribunals. By contrast, the analytical framework used to assess innovation and dynamic competition is less advanced, largely due to the challenges associated with measuring and quantifying innovation. Increasingly, however, competition agencies are taking innovation into account as a critical factor in their reviews of mergers and business practices. This is largely due to the fact that the ability of firms to innovate is an important driver for economic growth.
Because of the importance of innovation to market performance, the relationship between innovation and competition policy is one that is ripe for close and thorough examination. Businesses, for which innovation is vital to profitability and growth, and governments, for which innovation is central to productivity and global competitiveness, must work together to create conditions conducive to innovation.
In order to advance the thinking on these critical issues, the Bureau hosted the workshop to enable a variety of stakeholders to discuss the role of innovation across various industries, explore the relationship between competition and innovation, and examine how innovation should best be assessed by competition agencies.
- Welcoming remarks by John Pecman, Commissioner of Competition
- Panel 1 — Innovation in Canada
- Moderator: Jay Holsten, Torys LLP
- Panel Members:
- Carolyn Burke, Royal Bank of Canada
- Ken Engelhart, Rogers Communications
- Peter van der Velden, Lumira Capital
- Anthony Williams, Centre for Digital Entrepreneurship and Economic Performance
- Keynote address: William Kovacic, Global Competition Professor of Law and Policy, The George Washington University
- Panel 2 — The relationship between competition and innovation
- Moderator: Adam Fanaki, Davies Ward Phillips & Vineberg LLP
- Panel Members:
- Dr. Sorin Cohn, The Conference Board of Canada
- Dr. Renée Duplantis, Competition Bureau
- Dr. Ramsey Shehadeh, NERA
- Dr. Ralph Winter, University of British Columbia
- Panel 3 — The analysis of innovation in competition law
- Moderator: Denis Gascon, Norton Rose Fulbright Canada LLP
- Panel Members:
- Lisa Campbell, Competition Bureau
- Thomas Kramler, European Commission
- Frances Marshall, US Department of Justice, Antitrust Division
- Stephen Weissman, US Federal Trade Commission
The workshop resulted in a number of thought-provoking presentations and discussions covering a range of topics, including an overview of the economic literature on innovation in antitrust analysis, ideas for future research, and recommendations for policy makers and enforcement agencies on the assessment of dynamic competition. Some key themes that emerged from the workshop are summarized below.
Innovation in Canada: Drivers, challenges and the impact of competition
Representatives from Canada’s business, finance and policy communities provided insight on the key drivers of innovation in Canada, as well as the varied ways in which businesses have sought to respond to technological disruptions and increasingly global competition. With benchmarks for products and services often having evolved to the point of consumers seeking "one touch" and "just in time" solutions, businesses are challenged to seek the right opportunities for investment and also, where appropriate, to consider non-hierarchical and collaborative methods in order to create value.
Interplay between innovation, market structure and competition
Canadian business executives are in agreement that innovation is key to survival and remaining competitive in a global economy. It can, however, be difficult to draw broad conclusions about the role that innovation and competition play within any particular market, as the relationship between innovation and competition is often industry-specific. Certain environments are inherently fluid and responsive, and are thus less likely to enable a dominant firm to emerge or sustain market power. In other environments, pre-existing market power is an important consideration in evaluating the competitive landscape.
Since the seminal work of Joseph Schumpeter more than half a century ago, the relationship between innovation and competition has periodically received that attention of economists. While early theories suggest that monopolists may have the strongest incentive to innovate, others theorize that fiercely competitive firms are more likely to innovate. Many academics have found that the relationship between innovation and competition is an "inverted U-shape", whereby innovation is lowest in markets either dominated by a single firm or fragmented among many, and is highest in markets where the number of firms is somewhere in between. However, there has been a dearth of innovation research conducted in the context of competition policy, and it is apparent that more is required in order to better shape enforcement policies.
Impact of consolidation on innovation
There is no definitive answer as to whether increased scale and consolidation affect innovation negatively or positively, and further analysis should be performed in respect of post-merger impacts upon innovation. Such analyses could measure outcomes such as outputs, innovation diversion ratios, sources of efficiencies and the trade offs between static price effects and dynamic innovation effects, while taking into account compounding returns to innovation. In seeking to measure these outcomes, agencies should be mindful of the limitations of some commonly used metrics. For example, solely measuring changes in R&D expenditures can be a poor proxy for measuring actual impact upon innovation. Rather, an approach that takes into account multiple metrics is more likely to provide a nuanced result and a better measure of total investment in innovation.
The role of intellectual property rights
Intellectual property rights, properly constructed and calibrated, are complements to competition law, and can play an important role not only in providing incentives to innovate and invest, but also in informing enforcement decisions and advocacy initiatives by antitrust agencies. Agencies can support innovation through the appropriate use of intellectual property rights by issuing intellectual property guidelines, spearheading workshops and reports, reviewing prospective activities and issuing policy and position statements.
Challenges for competition agencies: Policy and enforcement
While innovation has always been a challenging factor for competition authorities, in the modern era innovation is faster and more dynamic than ever before and raises particular questions regarding competition policies on mergers, reviewable practices and cooperative agreements. Assessing market power now often necessarily requires an analysis of dynamism, in addition to factors such as price and output. In performing these analyses, agencies should rigorously apply an evidence-based approach to assess the impact of mergers, competitor collaborations and business conduct upon incentives and means to innovate. Relevant factors that can inform this approach include a consideration of the activities of companies currently innovating or likely to innovate in a market, the anticipated quality of each company’s products, the results of any natural experiments that could be analyzed, and the expected timeline associated with the introduction of new products. Additionally, when dealing with next-generation products, the possible enhancement of market power within a future market may be an important consideration.
Importantly, agencies may need to accept the inevitability of experimentation, taking calculated risks based on the best analytical tools available, performing ex post facto reviews of their decisions, and being transparent with their reasoning. In terms of policy implementation, agencies can regularly invest in "competition policy R&D," consulting with stakeholders and coordinating with international agencies.
E. Next steps
The Bureau will continue to actively incorporate factors relevant to innovation and dynamic competition in its assessments and investigations. The Bureau also looks forward to further opportunities in which to consult with its stakeholders, and provide guidance through position statements, bulletins and additional workshops.
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