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Emerging competition issues: Keeping pace in a changing world

Remarks by John Pecman, Commissioner of Competition

Ottawa, Ontario

January 19, 2016

(As prepared for delivery)

Thank you, Matt.

Good morning, everyone.

On behalf of the Competition Bureau, it is my pleasure to welcome you to our workshop on emerging competition issues. Thank you all for joining us today.

I’d like to begin the day by highlighting the crucial importance—for policy makers, regulators and enforcers—of keeping pace with respect to the two themes of the day.

First: making room for disruptive business models.

It is truly remarkable to think of the new products and services that have emerged over the past five years. I never imagined that I would be able to take out my phone and‑at the touch of a button‑hail a taxi, pay for my morning coffee and watch my favourite sports teams live. We are experiencing an era of rapid technological advancement that is giving rise to innovative new business models and changing consumer attitudes.

The economist Joseph Schumpeter asserted that innovation creates economic growth by bringing about new ways of doing things that could make the old ways obsolete. He famously coined the term "creative destruction" to describe the result of innovative forces in the marketplace. While the old ways may disappear through the process, the new ways unlock huge benefits and create massive economic potential that simply did not exist before.

Why is this important to the Bureau? Because competition is a key driver of innovation. In open and competitive markets, firms are driven to adopt more efficient production processes, and to offer new and improved products and services to customers. As the Competition Policy Review Panel stated in its 2008 report, "competition is the strongest spur to innovation and value creation, leading to a higher standard of living for all Canadians".

But both competition and innovation can be stifled by anti‑competitive business behaviour or by overly restrictive regulations. As the term "creative destruction" implies, innovation can disrupt existing markets and pose a competitive threat to traditional industries. In response, market incumbents may adopt business strategies that make it difficult for new players to enter the market, or may pressure regulators to restrict new business models. This is where competition authorities come in, through the use of a combination of enforcement and advocacy tools.

On the advocacy front, the Bureau strives to promote an efficient, vibrant and innovative marketplace by providing advice to regulators and policy makers. There are areas where regulations are needed to achieve legitimate policy objectives or to address market failures. However, overly restrictive regulations can prevent the entry of innovative new competitors, depriving us of the potentially enormous consumer and economic benefits that innovation brings.

In our rapidly changing world, it is more challenging than ever for regulators to strike the right balance—to achieve their policy objectives while allowing competition and innovation to thrive. The role of competition agencies in helping public policy makers find that balance has never been more critical.

The Bureau promotes competition in a number of regulated sectors where disruptive innovations are at play. In June 2015, we responded to the Department of Finance’s consultation call on the Oversight of National Payment Systems to encourage competition and innovation in Canada’s retail payment systems. The Bureau’s submission recommended, among other things, providing more flexibility for consumers to switch between competing mobile payment and digital wallet services. Innovative entrants have the potential to inject new competition into the Canadian payments landscape and this recommendation would make it easier for consumers to take advantage of these new products and services. Given that many consumers make electronic payments multiple times a day, increasing competition in this sector could bring significant benefits to Canadians.

Innovation has also been highly disruptive in the taxi industry, where a tightly controlled market is now threatened by new ride services. In November 2015, the Bureau issued a white paper highlighting the importance of establishing a single, level playing field where all the players can compete. The Bureau recommends that, where possible, regulators relax restrictions on traditional taxis, rather than imposing additional regulations on new entrants in the industry. When regulations are required, they should be no more intrusive than needed to meet legitimate policy objectives. Municipalities across Canada are considering changes to their regulations in the taxi industry, and it is in this rapidly changing environment that advocacy is needed the most—before regulations are finalized that may stifle competition. Allowing competitive forces to shape the market will benefit both consumers and operators by encouraging low prices, quality services, greater efficiency and continuing innovation.

That brings me to the enforcement side, and to the second theme of today’s workshop: the consideration of non‑price effects in competition analysis.

The Bureau considers the impact that business practices have on factors beyond the price of products and services‑such as the potential to stifle innovation. This is relevant in many contexts, but is especially important in cases where incumbents react to disruptive new rivals by adopting practices that raise barriers for new competitors to enter a market or for the market to expand.

Historically, the Bureau’s analysis of mergers and abuse of dominance have focused on price effects. And there is a good reason for that: studying price effects leads to reasonably straight‑forward quantification of competitive harm. Less emphasis, however, has traditionally been placed on quantifying the effects that business conduct can have on other value points for consumers, such as product quality, convenience, choice, and innovation.

The need to quantify non‑price effects in merger cases where an efficiencies defence has been adopted by the parties is a new challenge presented by the Supreme Court’s recent decision on the Tervita case. While the Supreme Court was clear that a substantial prevention or lessening of competition may be proved through qualitative evidence, it added an additional quantitative burden in cases where the merging parties have put forward an efficiencies defence under section 96 of the Competition Act. In those circumstances, the decision requires the Bureau to quantitatively estimate "all quantifiable anti‑competitive effects" where possible. Examining useful and practical ways to undertake this task will be part of our work going forward in merger cases where it is likely that the involved parties will employ a credible efficiencies defence.

Of course, non‑price effects are also important outside of the merger context. The Bureau’s litigation against the Toronto Real Estate Board (TREB) is a recent example of our enforcement work which touches on both non‑price considerations and disruptive business models. The Bureau’s abuse of dominance case focuses on restrictions imposed by TREB that affect new and innovative real estate brokerage models‑models that use websites to deliver services and that pose a competitive threat to TREB members operating in more traditional ways. These new models have important implications for non‑price elements of competition, such as product quality, consumer choice, convenience, and innovation. The hearing before the Competition Tribunal concluded in the fall of 2015, and we are now awaiting a decision.

Let’s return to Schumpeter’s wise commentary on creative destruction. The emergence of disruptive business models may pose a challenge for certain market incumbents, but they bring increased competition that benefits consumers, businesses and the economy as a whole.

It is the duty of policymakers, regulators and enforcers to nurture innovation and keep pace with changing times. That means ensuring regulatory frameworks achieve policy goals while allowing competition and innovation to flourish. And that means using up‑to‑date analytical tools to accurately capture competition dynamics in all industries, especially those undergoing rapid transformation.

Together, we can create an environment which nurtures competition, innovation and economic development. As a result, Canadian businesses will continue to thrive and consumers will enjoy access to a wide range of innovative products and services at competitive prices.

With the goal of ‘keeping pace’ in mind, let’s kick off the workshop. The diverse perspectives in this room should lead to an exciting exchange of ideas and insights, and I’m looking forward to hearing from all of you.

Thank you.

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