Canada's Competition Policy -- A Social Democratic Perspective

The House of Common's Industry Committee (which NDP MP Bev Desjarlais is a member of) tabled a report on Competition Policy in April, 2002. Desjarlais added a dissenting opinion to the majority report which is an excellent addition to progressivepolicy.ca. The minority report makes the case for competitive markets but argues that regulation also has a role in promoting competition. Thus, it challenges both the far left's argument
the competition and markets almost always lead to negative societal outcomes, and the far right's idea that governement regulation, however minimal, hinders well functioning markets.

Read the full Industry Committee report (link to official report)

NDP Dissenting Opinion
Bev Desjarlais, MP Churchill, NDP Industry Critic

Introduction

The Majority Report focuses exclusively on fine-tuning Canada’s existing
competition laws and makes recommendations to that effect. What the
Committee has failed to recognize is that competition laws, while important,
are not the be all and end all of competition policy.

Due to its narrow focus, the Majority Report does not consider the
implications of other government policies on Canada’s overall competitive
framework. Tinkering with competition laws, as this Report recommends, will
have little impact on competition in Canada without addressing the broader
policies government policies that undermine competitive markets.

The Social Benefits of Competitive Markets

It is worth underlining that social democrats support the establishment of
competitive markets as a fundamental social good unto itself. Our history in
the twentieth century has proven, beyond any doubt, that competitive market
economies deliver better, more prosperous, more comfortable and fulfilling
lives for citizens than any of the anti-market alternatives. Competitive
markets maximize our prosperity by encouraging entrepreneurship and
efficiency and by widening consumer choice.

The Liberals and the other right-wing parties talk incessantly about the
benefits of markets. Unfortunately, all this talk is merely a smokescreen
for policies that distort markets and promote monopoly at the expense of
competition.

Perfect Competition

It should go without saying that competition is the basis of a properly
functioning market. Economists evaluate the competitiveness of a given
market against an idealized model of perfect competition. Perfect
competition requires: 1) that buyers and sellers have all the information
they need to make informed choices; 2) that there are enough buyers and
sellers to prevent any one actor from influencing the market; 3) homogeneous
products; 4) that there are no barriers to market entry; and 5) perfect
mobility of production factors.

Eliminating Distortion

In real life, markets never achieve the ideals of perfect competition. Any
real life factor that interferes with one of the five assumptions of perfect
competition is a market distortion. The fewer distortions there are in a
given market, the more its outcomes benefit society. Conversely, when
markets are distorted, the benefits of competition are reduced or negated.
Thus, the object of our government’s competition policy should be to
eliminate and/or mitigate market distortions.

Regulation vs Distortion: How the Right Distorts Competition

The political right has built a false mythology about markets. This
mythology holds that all government regulation is, by definition, a market
distortion. It follows from this that removing regulations removes
distortions and moves markets closer to perfect competition. The Liberal
government uses this ideological approach to justify deregulating everything
they possibly can.

The problem with this approach is that regulation is not, by definition, a
market distortion. Sometimes it is, but most government regulations actually
promote competition by reducing market distortions, thereby making markets
more competitive. This is due to the fact that, in the real world, markets
have built in distortions. Effective regulations eliminate or mitigate these
distortions and make markets more competitive.

Real Life vs Ideology: The Repeated Failures of Deregulation

Without sufficient regulation to eliminate or mitigate distortions, many
markets inevitably become, to a greater or lesser degree, anti-competitive,
inefficient and harmful to consumer choice. The kinds of markets that are
prone to these outcomes when deregulated are those that, structurally, are
the furthest from the ideal of perfect competition. The more distortions a
market has in its unregulated state, the more anti-competitive it is in the
absence of corrective regulations.

In our experience with deregulation in North America, markets with severe
barriers to entry and limited numbers of sellers have consistently been the
most failure prone when deregulated. Examples of such industries include the
airline industry, electricity and health care.

Canada’s airline industry is a striking example of an industry in which
government deregulation has increased market distortion, leading to a
single-airline monopoly. This is because the airline industry is,
structurally, so far from the ideal of perfect competition that, in the
absence of regulations to correct its distortions, it rapidly trends toward
the elimination of competition. It has enormous barriers to market entry and
far too few sellers to prevent market manipulation. For consumers, the end
result of deregulation has been the elimination of choice and higher air
fares, the opposite of what the government promised when it deregulated the
industry.

Outcomes have been similarly negative in the electricity and health care
sectors. Jurisdictions that have deregulated electricity markets, such as
California and Alberta, have experienced monopolistic price manipulation
and, in the case of California, deliberate manipulation of energy supplies
that led to blackouts.

America’s supposedly free market health care system is, in fact,
demonstrably less efficient than Canada’s highly regulated system. The
American system is also highly intrusive into personal medical decisions.
Private insurance companies routinely second guess treatments and prevent
Americans from switching doctors. Thus, Canada’s highly regulated health
care system delivers the benefits of competition, greater efficiency and
choice, better than America’s less regulated model.

When confronted with the real life failures of their mythology, the Liberal
government and others on the political right respond with a convenient
tautology. Any time deregulation fails, they simply claim that they did not
deregulate enough and use this to justify further deregulation that further
distorts the market. This refusal or inability to grasp when cold hard
reality contradicts theory is classic ideological behaviour.

How Regulation Promotes Competition

All markets have built in distortions that reduce or negate the benefits of
competition. Economists recognize that perfect competition is an
unattainable ideal. Regulation promotes competition by eliminating or
mitigating market distortions.

For an example of how regulation eliminates market distortion, look no
further than your local supermarket. The government imposes very strict
labelling regulations on most supermarket products to make sure consumers
have information on nutritional factors and price per unit. Since consumer
information is one of the requirements of perfect competition, these
regulations eliminate a market distortion and help the market function more
efficiently. The world is full of similar examples of regulations that
expedite commerce, like government regulations of weights and measures and
enforcement of standards and labelling on other products, like textiles and
consumer durables.

Regulations can also mitigate market distortions to reduce their harmful
effects on competition. Let us return to the example of the airline
industry. No regulations can eliminate the barriers to market entry, such as
the prohibitive start-up costs and the limitations of the supporting
infrastructure like airports and air traffic control resources. However,
more effective regulations to prevent the Air Canada monopoly from using its
market power to systematically destroy all competition could at least
mitigate the distortions inherent in this market.

New Democrats, New Vision for Competition

Canada’s New Democrats propose a new approach to competition policy,
beginning from the assertion that government has a positive role to play in
promoting competition by eliminating and mitigating market distortions. This
would mean a departure from the dominant mythology that government
regulation is automatically distorting.

While New Democrats do not oppose the minor tinkering proposed by the
Majority Report, we consider the report inadequate because it is constrained
by its narrow focus. There is no discussion of, for example, the role that
consumer rights play in competition policy. Well-informed consumers are a
necessary part of a healthy competitive market, and one of the requirements
for perfect competition, yet the Liberal government continues to ignore
growing public demands for more information on the labels of consumer
products.

New Democrats have been at the forefront of campaigns for mandatory
labelling of genetically modified foods and changes to the Textile Labelling
Act that would tell Canadian consumers whether or not the clothes they buy
are produced with Third World child labour. By refusing to make this
information available to consumers, the Liberal government is deliberately
protecting the market distortions created by this lack of information. In so
doing, they contradict their stated support for competitive markets and
expose their real agenda — to protect companies with existing market power
at the expense of new entrepreneurs and competitors who would offer the
public a wider range of choices.

Labelling is just one example of an area where the Liberal government’s
ideologically driven antipathy to regulation results in less competition and
choice. Another example is their headlong rush to deregulate industries,
like the airline industry, which contain major structural distortions that
require regulation to prevent natural monopolies from taking hold. The
result of their "deregulate everything" approach is less competition, the
rewarding of inefficiency, less choice and higher prices for consumers. The
only winners are companies that already have market power, which are free to
abuse their dominant market positions. The losers are consumers, smaller and
newer businesses, entrepreneurs and society as whole, which loses out on the
benefits of a dynamic and innovative economy.

When New Democrats challenge the Liberal government’s ideological refusal to
promote competition in the economy, the government typically responds with
unfounded accusations that the NDP is an enemy of business and enterprise.
Nothing could be further from the truth. We do not call for massive
government intervention in the economy, but rather a balanced approach
focused on promoting healthy competitive markets. Indeed, the real enemies
of enterprise are the anti-competitive policies of the government that
promote and protect inefficient monopolies, gouge consumers and squeeze the
innovation out of our economy by blocking competition from newer, smaller
and more dynamic businesses.

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