INDU Committee Report

Competition (or "antitrust") legislation has existed in Canada for more than a hundred years. The name of the governing Act has changed several times over the years, as has the Act itself. Consequently, Canada’s antitrust Act has become a more effective instrument of the public interest with each significant revision. However, the primary goal of the legislation essentially remains the same: the quashing of conspiracies and monopoly-making restraints of trade (except those held exempt by parliamentary privilege). Canada’s first competition law, passed in 1889 and entitled An Act for the Prevention and Suppression of Combinations Formed in Restraint of Trade, marked a new era in the public’s distaste for, and treatment of, monopoly. The 1889 Act made the formation of "combines" ¾ the term used to describe conspiracies at that time ¾ a violation of the Criminal Code, following an era of general laissez-faire.

The new law was a response to political pressures from the public at large, as well as from a vocal and well-organized small business sector that mounted a very effective campaign against big business. Indeed, the economic developments that precipitated the enactment of Canada’s first antitrust Act are worth reviewing given the momentous changes we are experiencing in today’s rapidly developing economy. The similarities and differences of the two periods are both revealing and informative; and there seem to be implications for what appears to be happening today.

Beginning in the latter half of the nineteenth century, after substantial public investments had been made in railway and telegraph networks, large and more complex industrial organizations began to appear in Canada and elsewhere across the world. New advances in applied science, the increasing division of labour, and the emergence of a new managerial class promoted the growth of the modern industrial complex, as the corporation began to spread its activities both horizontally and vertically. These new technologies dictated massive investments in capital and a commitment to building integrated operations extending both backward into core raw material supplies and forward into marketing and distribution networks. In this way, the corporation, bolstered by new financial instruments for funding growth, could realize the inherent economies of scale and scope in the new production methods, while securing the necessary returns on investment.

These new production processes led to the creation of many new industries at the same time as they considerably transformed many old industries. Unfortunately, the good came with the bad. The unprecedented cost advantages bestowed on large-scale operations benefited those who were first to transform their businesses in conformity with the new economic realities, while vanquishing the remainder. Small manufacturers were at a significant cost disadvantage, but so were wholesalers, manufacturers agents and other middlemen when the volume-oriented manufacturers moved forward and mass retailers moved backward into wholesaling. The displaced merchants were the leading businessmen in the smaller cities, towns and villages of the time, and they formed a very influential political constituency alleging predatory behaviour on the part of big business and demanded relief through legislative action.

The United States and many European countries also underwent these experiences at about the same time, but a unique set of circumstances meant that Canada was the first to respond. Canadian politicians well understood the economic advantages and increased material well-being resulting from these revolutionary technological and organizational innovations, but believed Canada’s small population would impede their development. Rather than see Canada become an economic satellite of the United States through the exportation of natural resources and raw materials in return for the new and more advanced manufactures, the Government of Canada in 1879 adopted its "National Policy." Spearheaded by very significant tariff barriers on industrial products, the protectionist policy aimed to forge an industrial heartland in Ontario and Quebec. However, the subsequent suppression of foreign competition only heightened the public’s suspicions of the business combinations being formed at this time. In 1888, a select committee of the House of Commons was formed to investigate the nature and extent of certain combinations (e.g. groceries, egg dealers, sugar, biscuits, confectioneries, coal, iron and steel foundries, etc.). Legislation was the recommended course of action and Canada’s first antitrust law was passed the next year.

A similar set of circumstances appears to be unfolding today. The source of change is again innovation, but this time it has less to do with cost advantages of scale and scope associated with new physical capital and more to do with creative advantages associated with the stock of knowledge (or "human capital"). Rather than one-time changes, followed by a period of exploiting size and scope, the knowledge-based economy now being developed is accompanied by a process in which products, processes and methods of distribution and organization are constantly upgraded and improved. This constant change is a source of disequilibrium and uncertainty for all of us.

Hand in hand with this process of "out with the old, in with the new," or "creative destruction" as it is sometimes called, comes organizational and institutional innovation. Corporate managers, now under pressure to raise productivity through innovation rather than through economies of scale, have focused on designing lean production capabilities and downsizing their core activities, while outsourcing non-core functions and sub-assembly activities to their affiliates or strategic allies (sometimes spinoff companies from their downsizing efforts). Moreover, encouraged by recent advances in transportation and communications technologies while taking advantage of the new trade environment sweeping the globe, the locations of critical stages of manufacture and assembly are being chosen to ensure that the entire production process more fully exploits competitive advantages wherever these exist, whether because of economies of scale, scope or learning by doing, or because of greater factor specialization. Canada’s business sector is increasingly internationalizing its activities, weaving an intricate web of linked activities around the world. Consequently, Canada’s small businesses are again under pressure to change their business models in face of stiff competition from big business, foreign and domestic. Nowhere is this more apparent than in the retail gasoline industry, which has been the object of much public, political and antitrust scrutiny, the retailing of groceries and the newspaper industry.

Beginning in the mid-1980s, the traditional full-service gasoline stations that provided gasoline, car repair and automotive ancillaries (oils, lubricants, windshield wipers, air filters, etc.) were replaced by self-serve gasoline stations providing gasoline, a more limited range of automobile ancillaries and, in some situations, confectioneries. Retail gas station owners have had to invest in substantial capital equipment encompassing a greater number of larger underground storage tanks, spacious dispensing bays, easy-to-use pumps and a central payment booth. This more capital-intensive gasoline-focused operation allows some to take advantage of existing economies of scale by selling greater volumes of gasoline, but has also resulted in a long-term oversupply of retail gas operations, some of which have had to leave the field. The antitrust scrutiny is thus focused on whether those being forced out of business are inefficient suppliers (i.e. vertically integrated or independent retailers) or independent retailers who were efficient but disadvantaged through predatory pricing policies of the integrated gasoline operators.

Innovations in pricing policies, such as the larger grocery retailers’ imposition of "slotting fees" for scarce shelf space, have been in place for some time, but are now proliferating rapidly (some suggest at the same rate as new products are introduced, which, according to an industry study, was more than 18,000 in the past year). Demands for a lump-sum payment (originally for a slot in the retailer’s warehouse and now for shelf space), particularly from the larger mass retailers operating in highly concentrated markets, are as controversial as the chain store movement of the 1930s. The slotting fees are one of a number of marketing practices implemented to introduce new and risky products, in particular groceries, books and children’s toys, into the marketplace. While the fees may discriminate between various manufacturers, they also to some extent share risks between retailers and manufacturers (apparently more than 70% of new grocery products are removed from the shelves within the first year); thus, the circumstances dictate whether the fees are pro or anticompetitive. Antitrust scrutiny focuses on whether these pricing practices are legitimate responses to scarcity or whether, by closing market distribution channels to the smaller manufacturers, they constitute either anticompetitive price discrimination or an abuse of a dominant position in the marketplace.

Print media, in particular the newspaper industry, have undergone significant restructuring since the emergence in the 1960s of new technologies, such as computers and "cold type" composition or offset printing; however, the impact of the most profound development, the Internet, is yet to be felt. So far restructuring has included consolidation and increasing concentration of ownership and some industry stakeholders contend that, for a democratic country like Canada, too much political and cultural power is now held by too few media moguls. The Competition Bureau has conducted a review of all major newspaper mergers and acquisitions throughout this period, but, understandably, it has focused solely on its narrow mandate relating to the commercial side of the business and neglected the broader public interest aspects such as editorial diversity and quality. Given the absence of a formal review process for these fundamental public interests and the in situ merger review process set up under the Competition Act and the Competition Tribunal Act, various industry stakeholders have suggested it would be worthwhile to look at expanding the objectives of these acts and the mandates of the Competition Bureau and the Competition Tribunal to include broader social interests.