By Vincent Geloso, July 17, 2023
There is a new fad in the domain of competition policy that is dubbed “hipster antitrust” by those who partake in it. The core aim of that group goes beyond merely acting as a regulatory watchdog. It seeks to have government regulatory bodies get more actively involved in guiding competition to the point of proactively shaping the structure of markets.
While it is American in origins, the fad has crossed the border into Canada. In the fall of 2022, the federal government announced consultations to revamp the Competition Act and issued statements that showed affinity with the hipster antitrust logic. The federal Competition Bureau appears only too eager to join in.
However, the history of Canada’s competition policy provides powerful reasons to resist the fad. Indeed, not only are there many flawed assumptions in hipster antitrust thinking, but there are also important historical facts that are conveniently omitted.
To see how, we should return to the origins of Canada’s competition policy: the Combines Inquiry of 1888 by the House of Commons. Instigated by Nathaniel Clarke Wallace, a Conservative MP, the inquiry gave birth to the Anti-Combines Act of 1889. Adopted a full year before the Sherman Antitrust Act in the United States, the Anti-Combines Act was the first of its kind in the western world.
Wallace picked a number of industries he believed were colluding or were being monopolized. These included oatmeal-milling, barbed wire, sugar refining, biscuit confectioners, coal oil wholesaling, barley dealing, biscuit confectioners and egg processing. Wallace did not include the cotton manufacturing industry which was the most frequently accused colluder of the late 19th century – something that other parliamentarians reproached to Wallace.
If anti-competitive behavior is understood as prices of a certain product rising faster than the prices of other goods, while output is being restricted, then we should expect that the industries targeted by Wallace would exhibit rising prices and falling output. Using data from old newspapers, the House of Commons’ committee and trade journals, I was able to recreate price and output data for most of the accused industries. None of them showed what we should have expected.
Prices in all these industries were falling faster than the general price level. For example, the much-reviled sugar trade saw inflation-adjusted prices fall by between 1.9 and 3.1 percent per year during the 1880s. This was while consumption per person increased 4.3 percent on average each year.
For the coal industry, the proportions are even starker. Inflation-adjusted prices fell 3.8 percent per year even though per-capita consumption increased 7.2 percent annually. All of the increases in consumption were faster than the increase in income per capita. Similar trends were observed for all of the other industries.
This is hardly strong evidence on which to justify legislation that regulates competition. If anything, it showed that the markets were already highly competitive. So why regulate them?
This happened because there was a fatal flaw in the assumption that Wallace shared with the hipster antitrust crowd: that the number of firms in an industry (or the size of the largest firms) is a reliable indicator of competitiveness. Indeed, concentration could arise because the larger firms are the most efficient in the sense that they have the lowest costs of production. As such, mergers and consolidation might even be desirable from the standpoint of consumer welfare if it can further reduce production costs and, in turn, retail prices.
The only issue for competitiveness in that case is contestability. Can other firms enter a market and challenge an incumbent who attempts to use the fact that there are few players left to raise prices? The fear of entry by potential challengers keeps the incumbent firms on their toes. They have to keep innovating, improve their services and cut prices in order to deter challengers from entering. As long as entry is possible, the number of firms on a market says little to nothing about consumer welfare.
And this is why the firms that Wallace targeted were behaving competitively. The report he produced is filled with observations that attempts at collusion broke down because new players had entered an industry, that parties to collusive agreements often entered into them in order to bust the cartel and make a profit, or that collusion was simply impossible because entry was too easy. Contestability was easy, possible and effective at forcing big firms to act competitively.
But even more telling is who latched on to Wallace’s efforts to restrict the practices of big firms. Consumers were only trivially considered in the debates over the Act. Smaller, less efficient firms who were competing against larger and more efficient firms constituted the bulk of the evidence that favoured passing the new law.
One particularly interesting example was an Ottawa coal merchant who argued against the monopoly of the largest coal distribution firm. In his testimony, he quoted the prices at which he sold coal in the city. However, newspaper adverts at the time show that his competitor’s prices were 10 to 15 percent lower than his. Many businessmen in other trades made similar claims against their competitors, arguing that it was impossible for them to earn “a living profit”. This echoes the findings of American economic historian Werner Troesken, who showed that inefficient firms were key backers of the Sherman Act, in the belief that it would hinder the larger and more efficient firms. In other words, the origins of Canada’s competition law (just as elsewhere) were decidedly anti-competitive.
This historical overview offers dramatically different implications for competition policy. First, it tells us that good intentions can be co-opted by opportunistic industry players in ways that could hurt consumers. Second, it tells us that we should strike the idea of proactively shaping markets. Rather, the proper course of action consists in identifying barriers to entry by firms who seek to compete against incumbents.
This all implies a far more modest mission for the Competition Bureau. In fact, it should even involve having the Competition Bureau point out how other government policies – burdensome regulations, tariffs on imported goods, licensing requirements etc. – may be creating hurdles to competition. Anything beyond that involve accepting the flawed logic of the hipster antitrust fad.
Vincent Geloso is an Assistant professor of economics at George Mason University.
