This article originally appeared in the Financial Post.
By Jerome Gessaroli, February 16, 2023
There is growing concern that “big tech” companies like Google, Apple, Facebook, Amazon and Microsoft have become so large they pose a threat to competition in the digital economy. Those calling for change argue that Canada’s Competition Act must be strengthened to enable the government to regulate these firms’ market dominance.
But competition policy tools can be very blunt, and their use can have consequences worse than any benefits they might produce. Moreover, government already has significant powers to police competition. We therefore need to be careful with any reforms we make.
Often a market economy is evaluated against an impossibly high standard — the “perfect competition” described in introductory economics. Because the real economy inevitably falls short of this theoretical ideal, people call on government to step in and repair the deficiencies. But, as in many areas of life, we shouldn’t let the perfect be the enemy of the good.
If industry concentration is too high, activists say, government should break up the dominant business, limit its acquisitions or force it to provide data to competitors in order to level the playing field. That all sounds very reasonable, maybe even perfectly reasonable, but its unintended consequences could involve destroying the innovation and productivity that are key to Canadians’ standard of living.
The most troubling aspect of proposed changes to the Competition Act is their possible negative impact on productivity. The OECD already forecasts Canada will have the lowest productivity growth among its 38 member nations all the way out to 2060. Finance Minister Chrystia Freeland acknowledged as much in her 2022 budget speech when she referred to productivity and innovation as “the Achilles heel of the Canadian economy.”
We cannot afford even more regulation of the economy. Our ability to generate goods and services more productively relies on innovation — finding technologies, applications and business processes that produce more with less. Digital innovations such as 5G, Web 3.0, artificial intelligence and others will help drive us forward — unless regulation holds them back.
Another way to handle market dominance is to let the market self-correct. If a company has market power and can charge monopoly-like prices, it will generate monopoly-like profits. But over-sized profits create an over-sized incentive for others to innovate so they can capture some of those profits. It’s just such innovation and competition that will bring down prices and make consumers better off.
A critique sometimes levelled at the self-regulating market solution is that the dominant digital platform tends toward a natural monopoly. As more users join a platform, it becomes more valuable for everyone, thus encouraging even more users to join. This leads to a winner-take-all type of market and makes it hard to dislodge the dominant platform.
That argument is certainly not new. A 2007 article in The Guardian discussed the difficulty of competing against a large, well-entrenched social media platform. “Users have invested so much social capital in putting up data about themselves it is not worth their changing sites, especially since every new user that … (it) attracts adds to its value as a network of interacting people.” All true — except that the article was about MySpace, the once-dominant social media site. Size and barriers to entry certainly did not protect MySpace from being replaced by Facebook and other social media sites.
Others accuse big tech companies of limiting competition by buying out smaller, innovative players before they can operate at scale. But in many instances small companies are acquired primarily for their technical staff, rather than the product itself. This “acqui-hire” phenomenon is an effective method for hiring within Silicon Valley as it limits salary friction between new and existing staff and provides an exit strategy to venture-capital investors.
In a 2020 survey, 58 per cent of U.S. and 60 per cent of Canadian start-ups saw being bought out as a long-term goal. Regulations limiting acquisitions could eliminate a lucrative exit strategy for many start-up founders and their investors, with the unintended consequence of reducing the incentive for investors to provide the venture capital that is usually vital for a start-up’s success.
The federal government already has ample power to police competition. As currently written, the Competition Act is focused — correctly — on economic matters, such as price, quality, and innovation. It can already handle abusive practices by the operators of digital platforms. Although the act probably could use updating to increase possible fines and to broaden private civil actions covering allegations of anti-competitive behaviour, reforms to lower the standard for finding anti-competitive behaviour, enable “regulatory guardrails” or even address social issues could well end up reducing innovation, productivity growth and future living standards. That’s a mistake we do not want to make.
Jerome Gessaroli, a visiting fellow at the Macdonald-Laurier Institute, leads “The Sound Economic Policy Project” at the British Columbia Institute of Technology.