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How could product market competition be strengthened?
One of the key drivers of productivity growth in OECD countries is product market competition. Competitive forces are, in general, strong in Canada, in large part because most barriers to international trade have been dismantled, and administrative and economic regulations inhibiting competition are amongst the lowest in the OECD. Nonetheless, there are a few areas where improvements could be made. The institutional framework governing competition policy could be enhanced in several ways:
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The Competition Act could be strengthened by permitting ready prosecution of hard core cartels while providing appropriate civil law enforcement for economic conduct that warrants more refined examination, and by converting the prohibitions on predatory and discriminatory pricing from criminal to civil violations.
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Compliance with the Act’s civil provisions may be enhanced by authorising monetary penalties for abuse of dominance and other civil violations of the Competition Act; expanding private access to the Tribunal to cover all of the Act’s civil provisions (except mergers); and permitting private plaintiffs to sue and recover for damages for violations of the Act’s civil provisions.
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Although progress has already been made, lingering misperceptions regarding the independence of the Competition Bureau could be further dispelled by continuing to present its budget as a separate line item within Industry Canada’s Estimates. This would reinforce the move towards greater transparency for the Bureau.
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More generally, the Bureau (or an independent third party) could be mandated to undertake comprehensive studies of competition in relevant sectors on its own initiative, to identify the causes of market failures and to make competition enhancing recommendations.
Although competition in most sectors appears to be vigorous, it is rather lacklustre in several specific cases. Canada’s regulated conduct doctrine exempts anti competitive behaviour when required by regulation, and thus some significant parts of the economy remain shielded from competition law. This is a particular problem with provincial government regulation. Hence, identifying sectors where reform is most needed through a comprehensive review of the impact of these restraints on competition would be welcome. Although progress has been made, restrictions on inter-provincial trade continue to exist, and implementation of the Agreement on Internal Trade is less effective than it could be. More attention needs to be focussed on removing those regulations that restrain competition in professional services, both within and between provinces.
Canada also has more significant restrictions on foreign ownership than almost any other OECD country — even though they are confined to a few key sectors — and they should be eliminated. For example, removing them in airlines (as well as lifting cabotage restrictions on domestic air routes) would spur competition and provide gains to consumers in the form of price reductions and greater choice. Foreign ownership restrictions in telecommunications and broadcasting may slow the diffusion of new technology, often provided by foreign firms. They are also burdensome, both here and elsewhere, because they could limit the pressure on incumbents to bear down on costs. In any case, the cultural and other policy objectives that Canada has traditionally sought by such means could be achieved more effectively through the direct and transparent mechanisms — such as Canadian content rules — that are already in place.
Indicators of economy-wide product market regulations
1. The regulatory stance is measured by a synthetic indicator ranging between 0 (least restrictive) and 6 (most restrictive) for each year and sector. It covers public ownership, barriers to entry, market structure, vertical integration and price controls. See Nicoletti and Scarpetta (2003) for details.
2. Includes barriers to competition and state control.
3. The indicator ranges from 0 (least restrictive) to 1 (most restrictive). Includes limits of foreign ownership, restrictions on foreign personnel and operational freedom, screening requirements.
Source: Nicoletti and Scarpetta (2003).
The electricity sector has traditionally been characterised by vertically integrated, provincially owned public enterprises, and competition has been largely absent. The sector stands out: while prices are low in international comparison — essentially reflecting the ample supply of low cost hydroelectric power — performance has been sub-standard over the past decade, as illustrated by comparatively poor productivity gains. While it is widely recognised that reforms are necessary, those undertaken in the past have mainly been aimed at bringing in private sector investment and protecting access to US wholesale electricity markets, while avoiding full competition in generating and retail markets. Only Alberta and Ontario have introduced widespread competition. Full wholesale competition in Alberta began at the same time as the California electricity crisis. The introduction of both retail and wholesale competition in Ontario was accompanied by an unusually hot summer and shortages in capacity. In both cases these unforeseen circumstances led to increases in prices and volatility and the imposition of retail price ceilings. In contrast with Ontario, Alberta’s reforms have been successful in large part because those caps were set at a relatively high level, thus preserving incentives for investment. Provinces would benefit from introducing more competition and implementing the structural reforms, such as vertical separation, required to achieve competitive electricity markets. In this effort, the success of reforms in Alberta and lessons learned from the mistakes in Ontario could be used to guide provincial policy makers.
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