The Commissioner of Competition, Matthew Boswell said in a recent speech that “it’s not bad to be big” while outlining the noteworthy legislative changes to the monopolistic practices provisions of the Competition Act. He added that “companies that grow large by innovating and competing on the merits should not be punished”. While high levels of market concentration can indicate potential monopolistic practices, modern competition policy recognizes that high market share alone should not be a concern. Instead, the competitive dynamics of the market, consumer welfare, and the behaviour of the firms within the market must be considered to accurately assess the implications of market concentration. That being said, the recent amendments to the merger provisions which repealed the efficiency defence, introduced U.S. style rebuttable market concentration presumptions and now permit mergers to be blocked on the basis of market shares alone suggest that proposed mergers in concentrated sectors could be in for a bumpy ride from the Competition Bureau.
Market Concentration, Competitive Dynamics and Consumer Welfare
In accordance with modern economic theory, market concentration is usually measured by the Concentration Ratio (CR) or the Herfindahl-Hirschman Index (HHI). A high CR or HHI connotes a market dominated by a few firms, while a low CR or HHI suggests a competitive market with many participants. These measures provide a snapshot of market structure but do not predict how competition will unfold. For instance, a highly concentrated market with a few firms could still be highly competitive if the firms vigorously compete on price, quality, labour and innovation. On the other hand, a market with many firms could exhibit collusive behaviour, leading to anti-competitive outcomes. By way of further example, the impact of entry barriers on market competition could be considered. If a concentrated industry has low entry barriers, new firms can challenge incumbents, thereby enhancing competition and benefiting consumers. Accordingly, it is clear that market dynamics matter more than firm size.
Modern competition policy primarily aims to protect consumer welfare, by promoting lower priced, high quality and innovative products. Where companies engage in aggressive competition to attract customers, a market with high concentration can still lead to improved consumer outcomes. For example, technology companies often consolidate to achieve efficiencies and drive innovation, which has actually benefited consumers through better products and services.
However, where a merger does in fact lead to excessive market power for a dominate firm, it leads to higher prices, reduced innovation and diminished consumer choice. Competition authorities rightly must challenge these types of anti-competitive deals on the basis of reduced consumer welfare and not on some arbitrary level of market concentration.
Market Concentration – The Good and The Bad
Enhanced Efficiency and Innovation – The Good
There are at least four types of industries where size is a benefit: industries that require scale, innovation-based industries, network-based industries, and industries facing global competition.[1] Economies of scale allow firms to produce goods or services at lower costs. Also, by merging resources, companies may accelerate research and development efforts, potentially leading to innovative products and services that can benefit consumers. Increased global competition incentives firms to become larger to better compete in international markets. Larger firms can pool resources, expand their market reach, and compete more effectively against global rivals. This can be advantageous for economic growth and job creation.
Reduced Competition and Consumer Choice – The Bad
The most significant concern with high market concentration is the potential reduction in competition, particularly at the domestic level. When a firm dominates a market, they may exert excessive market power, leading to higher prices, reduced innovation, harmful labour effects and diminished consumer choice. Consumers may find themselves with fewer alternatives and may ultimately bear the cost of reduced competition.
Recent Amendments to Merger Provisions – Market Shares Really Matter
Most notably, the recent Amendments repealed the efficiencies defense for mergers, introduced structural presumptions and allow mergers to be blocked on the basis of market shares. More specifically, with the removal of the efficiency defence and the failure to expressly include efficiencies as a pro-competitive factor for consideration,[2] it is now uncertain what weight, if any, the Competition Bureau or the Competition Tribunal will give to beneficial efficiencies derived from a merger. Further, there is now a presumption that a merger will result in a substantial prevention or lessening of competition (“SLPC”) where the merger leads to an HHI increase of greater than 100 and either (a) a combined post-merger market share of greater than 30%, or (b) a post-merger HHI of greater than 1,800. If demonstrated, the onus will shift to the merging parties to rebut the presumption of anticompetitive effects (i.e. to prove there is no SLPC).Lastly, the amendments the prior version of section 92(2) of the merger provisions, which stated that a finding of a SLPC cannot be grounded solely on the basis of evidence of concentration or market share. As set out above, it is not clear how evidence of market shares alone, for example in the absence of consideration of barriers to entry or other competitive dynamics in the market, could be sufficient to establish a SLPC.
The structural assumptions introduced by the Amendments represent a distinct shift away from the Canada’s previous effects-based approach to merger analysis. Aside from the this fundamental concern, another a key concern is that the thresholds selected for these new structural presumptions simply mirror those in the United States’ merger enforcement guidelines. Consequently, these thresholds fail to consider the unique characteristics of the Canadian economy, which differ considerably from the U.S. For instance, the U.S. GDP is over 12 times larger than Canada’s,[3] and market concentration may be lower in the U.S. particularly in regulated sectors such as banking and telecommunications.. This raises questions about whether structural presumptions in Canada have been designed to merely target companies with high market shares rather than to balance Canada’s wish to have large firms with sufficient scale to better compete on the world stage.
In contrast, in Europe, we are witnessing a competition policy renaissance in favour of larger, more efficient and innovative firms. In an EU report[4] on the future of European competitiveness published in September 2024 , Mario Draghi, the former Italian Prime Minister and former European Central Bank (ECB) President, highlighted the urgent need for Europe to bolster its competitiveness, warning that failure to do so could lead to a slow and painful economic decline. The so-called Draghi Report contains an urgent call to “adapt European competition policy” to allow greater corporate combinations. In line with the Draghi report recommendations, a recent Mission Letter from EU President Ursula von der Leyen to newly minted Competition Commissioner, Teresa Ribera spells out her task to “modernize the EU’s competition policy to ensure it supports European companies to innovate, compete and lead world-wide and contributes to [the EU’s] wider objectives on competitiveness and sustainability, social fairness and security.”[5] One specific priority from the Mission Letter pertains to reviewing the EU’s Horizontal Merger Control Guidelines and giving weight to the EU economy’s “more acute needs in respect of resilience, efficiency and innovation, the time horizons and investment intensity of competition in certain strategic sectors, and the changed defence and security environment.” The EU appears to be moving towards a net-benefit test where additional pro-competitive considerations of a merger are given weight in the competitive effects analysis. Meanwhile back in Canada, with the removal of the efficiency defence, the merger provisions under the Competition Act today do not expressly give any weight to the benefits from a merger whether it be efficiencies, innovation or investment. Rather, the amended law in Canada will significantly increase the business burden for firms to obtain regulatory approval for large firm consolidations simply because of the size of their balance sheet regardless of the actual competitive merits of the transaction
As highlighted in bold by the Commissioner of Competition in his recent speech, the principle that big is not necessarily bad should also apply to the Bureau’s approach to merger review. A forceful attack on large firm mergers, simply because of the size of the company, is not in the economic best interests of Canada, given the many benefits which firms with larger scale provide consumers. It is recommended that the Bureau’s revision to their Merger Enforcement Guidelines clearly reflect that the Bureau will never challenge a merger on the basis of market share alone, that it will recognize the pro-competitive benefits of mergers including the possibility of greater efficiency, innovation and investment, and commit to giving these factors appropriate weight where appropriate.
[1] https://macdonaldlaurier.ca/mli-files/pdf/Nov2021_Big_is_beautiful_Atkinson_PAPER_FWeb.pdf Sept.18
[2] https://chamber.ca/wp-content/uploads/2022/11/Toughening-Canadas-Competitiveness-EN.pdf See page 7.
[3] https://www.imf.org/en/Publications/WEO/weo-database/2021/October/weo-report?c=512,914,612,171,614,311,213,911,314,193,122,912,313,419,513,316,913,124,339,638,514,218,963,616,223,516,918,748,618,624,522,622,156,626,628,228,924,233,632,636,634,238,662,960,423,935,128,611,321,243,248,469,253,642,643,939,734,644,819,172,132,646,648,915,134,652,174,328,258,656,654,336,263,268,532,944,176,534,536,429,433,178,436,136,343,158,439,916,664,826,542,967,443,917,544,941,446,666,668,672,946,137,546,674,676,548,556,678,181,867,682,684,273,868,921,948,943,686,688,518,728,836,558,138,196,278,692,694,962,142,449,564,565,283,853,288,293,566,964,182,359,453,968,922,714,862,135,716,456,722,942,718,724,576,936,961,813,726,199,733,184,524,361,362,364,732,366,144,146,463,528,923,738,578,537,742,866,369,744,186,925,869,746,926,466,112,111,298,927,846,299,582,487,474,754,698,&s=NGDPD,&sy=2021&ey=2021&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
[4] https://commission.europa.eu/document/download/ec1409c1-d4b4-4882-8bdd-3519f86bbb92_en?filename=The+future+of+European+competitiveness_+In-depth+analysis+and+recommendations_0.pdf.
[5] https://commission.europa.eu/document/5b1aaee5-681f-470b-9fd5-aee14e106196_en