Submission by the Commissioner of Competition to Bank of Canada Consultation: Renewing Canada’s Monetary Policy Framework

October 1, 2020

On this page:

• Introduction
• Competition lowers inflationary pressures
• Competition drives productivity
• A competition culture will reinvigorate the Canadian economy
• Conclusion
• Footnotes

Introduction

I have read with interest, the Opening Remarks from the Bank of Canada's recent workshop on the renewal of Canada's Monetary Policy Framework.^{Footnote 1} In those remarks, Senior Deputy Governor Wilkins recognizes the important interaction between monetary policy and other public policy in supporting economic growth and price stability within the Canadian economy. This submission underlines the significant contribution that competition considerations can have in the broader economic policy context.

As Commissioner of Competition, I have a mandate to advocate for policies at all levels of government that support vibrant, competitive markets in this country.^{Footnote 2} This mandate flows from the long-understood principle that the competitive process is essential to ensuring a dynamic, resilient, and productive economy. My perspective is straightforward: to be at its best, Canada needs more competition.

Through this submission, I aim to reinforce that idea by focusing on three areas where competition supports better economic outcomes. The first is an explicit recognition of how the competitive process lowers inflationary pressures—bringing about the "good" disinflation that allows Canadians to access a wider range of products at lower prices. The second point is that greater competition is key to unlocking the type of productivity gains that matter so much to the continued wealth and prosperity of Canadians. Finally, the third is that, in a world of increasing marketplace concentration, we all need to adapt our approaches to preserve and maintain competitive vigour in the economy.

Competition lowers inflationary pressures

At a basic level, competition is the rivalry between businesses that makes them work harder to win customers. However, competition is not just about delivering goods to market at the lowest possible price. Competition unlocks economic value by motivating entrepreneurs to re-imagine all aspects of a business: developing products that better address the desires of consumers, more efficiently producing and distributing goods, and retailing those products in innovative and valuable ways.

Businesses compete with each other along a number of different dimensions. While some businesses may choose to pursue a strategy of making products available for the lowest possible price, others may focus on marketing a product of the highest quality, or developing a product that is on the leading edge of technology. Competition benefits Canadian consumers through lower prices, greater choice, and increased levels of innovation.

Each of these outcomes has a deflationary effect on the economy. Through the competitive process, consumers receive lower quality-adjusted prices that are both measureable and impactful – an effect that is extensively studied.^{Footnote 3} As Governor Macklem noted in a 2014 speech, competition unlocks "good" disinflation in the economy.^{Footnote 4}

Competition drives productivity

International studies consistently link higher levels of competition with greater innovation and productivity.^{Footnote 5} The competitive process drives continuous improvement by ensuring that those businesses that can produce the most output with the fewest inputs will thrive, while releasing those less equipped to other productive uses in the economy. This effect ensures higher economic productivity, which increases the wealth and economic well-being of Canadians.^{Footnote 6}

The link between greater competition and higher levels of productivity is broadly understood. In 2008, the Canadian government enacted a review panel to study the nation's competition policy. In its final report, entitled Compete to Win, the review panel noted both that: "the primary drivers of productivity growth are the investment, innovation and adaptation fostered by openness and competition", and that "Canada must improve its productivity by increasing competitive intensity."^{Footnote 7}

These are not merely theoretical conclusions. In the 1990s, Australia embarked on a substantial overhaul of its competition policy. This initiative modernized Australia's economy by increasing competition policy scrutiny of some industries, and deregulating and extending competition in others. According to a subsequent National Inquiry, these reforms contributed significantly to a 13-year economic expansion in Australia.^{Footnote 8} Of particular note, this National Inquiry found that Australia's competition policy reforms were directly responsible for increasing GDP by 2.5 percentage points per year.

A competition culture will reinvigorate the Canadian economy

Central bankers across the globe recognize the growing importance of pro-competitive policy-making. This interest has often focused on the impact of changing market structures resulting from the digitalization of markets, rising market concentration, and the rise of the "superstar firm".^{Footnote 9} Moreover, I would be remiss not to mention the significant contributions of Senior Deputy Governor Wilkins to this ongoing policy dialogue.^{Footnote 10}

As the digital economy disrupts and reshapes markets, authorities across the globe face a new set of challenges. For Canadian consumers and businesses to thrive in a digital economy, policy-makers need to seize opportunities to encourage competition and innovation in areas that matter to Canadians. That is why I have made it a top priority to emphasize vigorous law enforcement and competition promotion in digital markets.^{Footnote 11}

This links to a broader theme that I have championed in recent months. That is, if we truly want Canadians to thrive in the digital economy, we must develop a culture that embraces competition. Achieving a competition culture means that policy-makers will ensure that their policies actively support a competitive Canadian economy. To aid in realizing this goal, the Competition Bureau has recently published a toolkit that seeks to help policy-makers more explicitly consider competition in their policy processes.^{Footnote 12}

Conclusion

Canada needs more competition. Greater competition delivers better consumer results, and improves a broader range of macroeconomic outcomes. A greater focus on competition can act in concert with monetary policy in order to ensure the wealth and prosperity of all Canadians.

A nation does not inherit a strong competitive marketplace; it creates one by considering competition in the development of public policy. Canada has the potential to reap the real benefits of a strong culture of competition in our new economic reality, but it requires focus and collaboration. I encourage all levels of government to engage with us to work toward a better balance between regulation and competition.

Establishing a competition culture will neither happen overnight nor be achieved by any one organization on its own. I applaud the Bank of Canada for its ongoing work to highlight the role that pro-competitive policies can play in Canada's economic agenda. I hope that you will continue to consider competition as a key part of your research program going forward; the Competition Bureau is ready to do all that it can to deepen that focus.

Matthew Boswell
Commissioner of Competition