INST Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Wednesday, April 2, 2003

¹

1545

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

Mr. Thomas Ross (Professor, University of British Columbia, As Individual)

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1550

¹

1555

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. Thomas Ross

Mr. Larry Bagnell

Mr. Thomas Ross

Mr. Larry Bagnell

Mr. Thomas Ross

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

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1600

Mr. Thomas Ross

Mr. Brian Fitzpatrick

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1605

Mr. Thomas Ross

The Chair

Mr. Andy Savoy (Tobique—Mactaquac, Lib.)

Mr. Thomas Ross

Mr. Andy Savoy

Mr. Thomas Ross

Mr. Andy Savoy

Mr. Thomas Ross

Mr. Andy Savoy

º

1610

Mr. Thomas Ross

The Chair

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ)

Mr. Thomas Ross

Mr. Paul Crête

º

1615

Mr. Thomas Ross

Mr. Paul Crête

Mr. Thomas Ross

The Chair

Mr. Paul Crête

Mr. Thomas Ross

The Chair

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.)

º

1620

Mr. Thomas Ross

Mr. Dan McTeague

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1625

Mr. Thomas Ross

The Chair

Mr. Brian Masse (Windsor West, NDP)

Mr. Thomas Ross

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1630

The Chair

Mr. Brian Masse

Mr. Thomas Ross

The Chair

Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)

Mr. Thomas Ross

Mr. Brent St. Denis

Mr. Thomas Ross

Mr. Brent St. Denis

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1635

Mr. Thomas Ross

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1640

The Chair

Hon. Gilbert Normand (Bellechasse—Etchemins—Montmagny—L'Islet, Lib.)

Mr. Thomas Ross

Mr. Brian Fitzpatrick

Mr. Thomas Ross

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1645

The Chair

Mr. Thomas Ross

The Chair

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CANADA

Standing Committee on Industry, Science and Technology

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NUMBER 034

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Wednesday, April 2, 2003

[Recorded by Electronic Apparatus]

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[English]

    The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): I call this meeting to order. Pursuant to Standing Order 108(2), we are considering Bill C-249, An Act to amend the Competition Act.

    Today we have Mr. Thomas Ross, a professor from the University of British Columbia. He has classes to go to, so we'll have to conclude by 4:45. I would ask that we get going immediately.

    Unfortunately, Mr. Ross, we had votes in the House, so that's why some of the members are detained. But we do have a quorum now, so I would ask you to begin, and then we'll open it up for questions.

    Mr. Thomas Ross (Professor, University of British Columbia, As Individual): Thank you very much, Mr. Chairman and distinguished committee members. Thank you very much for this opportunity to meet with you again. I know there are a lot of new faces on the committee since the last time we spoke, but I appreciate the opportunity to speak to you. I very much appreciate your willingness to do this by video conference, given my needs during these last few weeks of classes.

    I've submitted some notes, which I think will be translated and distributed to you in due course. Some of them draw on material from a report that Ms. Ann-Britt Everett and I wrote for the government in reviewing efficiencies in mergers in a number of jurisdictions.

    The question before you is an important one: how do we take efficiencies into account when we review mergers? It's also an extremely difficult question, and Canada is not alone in struggling with it. There are many countries who are rethinking the way they handle efficiencies in merger review. The way Canada has typically done it has been among the most sympathetic to efficiencies, of all the countries that we know have sophisticated, modern competition laws. The amendment might push us back a little bit, so that we are somewhat less sympathetic. It's interesting, though, that a number of other countries who are currently less sympathetic to efficiencies are rethinking their positions and are possibly going to integrate efficiencies into their review processes to a greater extent.

    As I know all of you know, competition law is framework law. Economists like competition and competition law, not because we like competition per se but because we think competition brings efficiency. Simply put, efficiency just means that we get the greatest output from the least input, and that the output gets to the people who value it the most. We'd like efficient economies, and in general we think that competition gets us to efficiency. That's why we like competition. In the odd situation where competition doesn't lead us to efficiency, we are quite prepared to consider other means. For example, we have patents that provide monopolies, but they provide monopolies for a purpose, that is, to provide incentives for innovation and inventive effort.

    This Canadian emphasis on efficiency in competition policy dates from at least the Economic Council report of 1969, which forcefully took the position that efficiency should be the primary concern of competition policy in Canada.

    Let me just start talking about mergers specifically. Firms and markets create wealth by turning lower-valued inputs into higher-valued outputs. Mergers affect this process in three ways. Mergers can create wealth when they allow the output to be produced at a lower cost. They destroy wealth when, as a result of the merger, prices are higher and output is reduced. And they also transfer wealth, when consumers pay higher prices if the competition is lessened and producers are enriched in the process.

    So the challenge for merger law is to combine these effects into a rule. What mergers will we allow and what won't we allow? Right now in Canada, we have some calls for change. I do want to make sure the committee understands that there are two really different demands for change coming forward. It's not clear that any one change would satisfy both demands. First of all, there is a demand from some quarters just for clarity; there's a feeling that after the Superior Propane decision, we're just not very sure what the law is. But there are also people who wish that the law would be tougher on efficiencies, to not be quite so generous in the treatment of efficiencies.

    To get to the bottom line of what my view is, I think that a good case can be made that where we are right now with the law is really not a bad place. It is not terribly unclear, I would argue. Where I see the law sitting is not a bad place and, in fact, might be a position that many people on both sides of the efficiency debate could appreciate and learn to live with.

    I also have some serious reservations about some possible negative effects of the proposed changes, which I'll get into.

    As for the current Canadian law, until the Superior Propane case most of us believed that Canadian law, or policy at least, was what we call the total surplus standard, which is to say that mergers would be approved if the total surplus or total wealth generated by a market went up as a result of the merger. This is an approach that does not take into account transfers between producers and consumers. What appeals to us economists about the total surplus approach is that it allows mergers that add to wealth and blocks mergers that subtract from wealth. It's also fairly simple in the sense that, since everyone is treated the same, we just add up the effects. We don't have to keep track of where the effects go specifically, or of the characteristics of the people receiving them.

    There are other arguments in support of this approach. I don't need to go into them all, but there's one I did want to mention because I don't hear it as much. I think it's fair to say that a lot of economists have a feeling that when you block a merger that would have been efficient, that represents fairly permanent damage to the Canadian economy, whereas when you allow a merger that creates some market power, that market power in general will be eroded over time. So the market power effect is more likely to be transitory, whereas the interference of a good merger could be more permanent.

    Some people object that transfers from consumers to producers are a bad thing. Of course, the consumers could be producers. Many consumers have shares through their pension funds and RRSPs. In fact, we also should consider the interests of workers, which are probably much more aligned with the interests of producers or shareholders than they are with those of the consumers.

    At any rate, the Federal Court in Superior Propane told us to take other things into account than just total surplus. So where does that leave the Canadian law? Professor Ralph Winter and I have argued in a recent paper that the current Canadian law is what we're calling a qualified total surplus standard. We draw this from the instructions received from the Federal Court and the tribunal's views on the total surplus standard. We think that basically what we have in Canada is a system where total surplus will in general be the rule except when there are obvious significant and adverse distributional implications of a merger. That's probably not a very bad rule. I'm pretty comfortable with it, and I think maybe a lot of economists would feel the same way.

    I don't think we're suffering from a lack of clarity. I admit it's not 100% clear, but I don't think it's so bad that we need a new law, with the kinds of problems that might bring in terms of lack of clarity, which you always have with new legislation.

    In my remaining minutes, let me make a few points about the specific proposals. Looking first of all at the original form of Bill C-249, I have some concerns about proposed subsection 96(4). That indicates that the majority of benefits should be passed on to consumers in the form of lower prices. There was some ambiguity in my mind as to what we were comparing. Lower prices than what? It could be lower prices than pre-merger. It could be lower prices than with the merger but without efficiencies. It turns out that in either case a rule like this could have us block mergers that actually lead to lower prices because the prices go down but not enough. That, I think, would be unfortunate.

    Some people might come back and say, in a case like that, if price falls, there isn't really a lessening of competition. Here is an important point I want to make. Lessening of competition and efficiencies are really two distinct effects. It's true that we can add them up and look at their total effect on price, but they are still distinct effects, and I think we should keep them distinct. We shouldn't pretend that there is no lessening of competition because price went down. You might find that a year or two down the road this firm that was created as a result of a merger, and we allowed it to happen because price fell, now has significant market power. It could start to abuse that market power, and we will want to accuse it of abuse of dominance. We would look a bit silly if we had passed on the merger earlier saying that the merger hadn't lessened competition. So for that reason I think it's best to keep those concepts distinct. Lessening of competition is one thing, and efficiencies are another.

    It is true that some jurisdictions have adopted this approach of basically saying if there are big efficiencies and price goes down, there's no lessening of competition. But in general those were jurisdictions that had no other way to bring efficiencies into the debate, and they wanted to. We're not in that situation.

    One other concern about this proposed subsection is that its focus on prices is maybe a bit narrow because consumers are affected by things other than prices. So you might want to say consumer welfare or consumer benefits. We worried about branch closures with bank mergers, as an example of something else that might affect consumers.

    Proposed subsection 96(5) argues for a special rule for dominant firms, and I think that's probably unfortunate as well, in part because it's very difficult to define dominance. You can imagine huge battles in cases over whether the particular parties are dominant if the rules suddenly get different and dominant is 50% market share but not 49%. I'm nervous about this. Of course, if you have a special rule for dominance that is so absolute, even a dominant firm merger that lowered price would be prohibited, and that would be unfortunate.

    The proposed amendment to Bill C-249 now proposes making it a factoral analysis. So efficiencies become just a factor to be considered. This is an interesting approach. What worries me here is that it's not clear how much weight efficiencies get in a case like this. It could be that even mergers that lower prices to consumers might not be permitted.

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    This approach also threatens to confound efficiencies and lessen the competition effect, which I've already said would be unfortunate. It's an approach that would seem to push us toward a price standard or a consumer benefit standard, but it could be worse than that. It could actually stop us from allowing mergers that reduce price.

    When you call it a factor, it's just not clear how much of a factor it would be. What does that mean? How do you add it in? So that makes me a bit nervous as well.

    For this reason, I think this approach would add quite a bit of uncertainty, because we don't know how to interpret factor, and uncertainty is costly in these circumstances. Firms don't want to go into this process uncertain. They will probably want to be in the commissioner's office negotiating some sort of settlement that's going to stay away from the tribunal, just because they want to avoid the costs of this uncertainty. It's hard for the commissioner to say no if people come in and say they want to satisfy the commissioner because they're afraid of going through the more detailed process. So I think that would be unfortunate.

    I know my time's up, so let me just conclude. I know my comments probably seem fairly negative. I'm very pleased at the interest this committee has shown in Canadian competition law. It's a far cry from years ago when you couldn't get any interest in it in Ottawa. Now we feel like we're heard when we say we need some thoughtful discussion and debates about amendments. I think that's a fantastic development.

    The bottom line for me in this particular case is that the current law is not as broken as some people seem to think and might be something we can live with, and all of the proposals for reform have raised concerns that make me think they may not be in the best interests of Canadian markets and Canadian efficiency--consumers or producers.

    Thank you very much for you attention, Mr. Chair and distinguished committee members. I'm happy to entertain any questions you might have.

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    The Chair: Thank you very much, Mr. Ross.

    We'll go to Mr. Bagnell.

    Mr. Larry Bagnell (Yukon, Lib.): I'll just start out by stating my bias. I think we need reform and I'm sort of consumer oriented. I think the first two are probably more reform than the amendment.

    Would either the original proposal or the amended proposal have changed the result in the case of Superior Propane? It was a disaster for consumers in my area of the Yukon and was the one part of Canada where it created a monopoly.

    Mr. Thomas Ross: They certainly would have made a difference in that case, but I'm glad you brought that up. I think that case could well have been won on a straight total surplus standard. It's easy to be a Monday morning quarterback, I suppose, but work done since has suggested that with a true accounting of the pre-existing market power in that market, that merger would not have passed, even with the total surplus test.

    While it is certainly true that the amendments would have made it very difficult to get that merger through, even under the total surplus approach some different strategic decisions could have blocked that merger. So the changes, in my view, weren't necessary to stop that merger.

    Mr. Larry Bagnell: It seems to me, on the surface, it wouldn't be that hard in almost every case to make it a case that there were more efficiencies as a route to monopoly, oligopoly, or whatever.

    Mr. Thomas Ross: A lot of people feel that way, but I don't. Once you start to get a lot of market power, it should get pretty difficult to pass a total surplus test, for a few reasons. First, in a merger review you're always balancing the probability of harm through higher prices with the probability of efficiencies. We know efficiencies are sometimes achieved and sometimes not, so we always discount those claims a little bit. Of course, we're also often not very sure about the lessening of competition, so we discount those.

    But once you start to get to a dominance situation, you get very confident that there's going to be a lessening of competition, so the balance tilts very squarely in favour of blocking the merger, just on total surplus. You really give the lessening of competition full weight and only give part weight to the efficiencies because there's some chance they won't be realized.

    When you add to that some of the other costs the dominant firms impose in terms of very significant price increases and possibly what accountants refer to as x inefficiency, which are inefficiencies and lack of innovation, these are things we probably don't use enough in Canadian competition law, and we could use them inside a total surplus test. I think mergers to dominance or monopoly would be very difficult to get approved. In the very rare case where it looked like they would get approved, under this qualified total surplus approach, if there were a significant redistribution of income you could still go at them.

    Mr. Larry Bagnell: I'll be interested in Dan's comment on that.

    My last question is related to enforcement. Except with perhaps the original amendment on the existing regime or the amended regime, it seems.... I don't know how enforcement would be.... Once you got the monopoly, you could certainly say that you'd do this, this, and this, and then a year later you could just crank the prices up once you were in your captive market.

    Mr. Thomas Ross: Oh, absolutely. So the bureau would evaluate the merger, and they're very good about this. They try to predict what the effect on prices will be down the road. They're going to hear all kinds of representations from the parties to the merger that prices are not going to go up or the price increases will be very modest. The bureau is very good at looking past that, at looking at the cost structure of the firm, the demand, and the possible substitutes available for that firm's products, and at determining what a likely price increase is. The bureau has people to do that, and I think they're very good at it.

    The Chair: Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): I just want to raise the issue of monopoly power. It seems to me we have to draw a distinction between somebody who gains market dominance through a competitive market situation and some sort of government-protected monopoly. It seems to me that if we look at history, we can see lots of examples in a market system where somebody gained market domination only to become very inefficient, arrogant, and bloated, and somebody else came along and eventually knocked them down a lot of pegs down the chain and so on. General Motors in the United States is one that comes to mind, or maybe IBM in computers or Sears in retailing and so on, and it just seems to me that's the way the market will eventually work. You'll get so big and so dominant that you'll become very inefficient, and somebody else is going to come along and pull you down.

    There's another issue on it too. In the competitive market system there's something we don't put a price tag on, and it's hard to put one on it; it's that an awful lot of the innovation in our economy comes from that dynamic, competitive market situation. That's where the innovation comes from. So if you get too much market dominance and too many monopolies and so on, you're going to lose a lot on the innovation side.

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    Mr. Thomas Ross: Those are two great points.

    On your first one, it's true, and you gave good examples of companies that got big and, you might even say, dominant and then lost their position. You mentioned General Motors as one. Of course, General Motors also almost eliminated Ford, because Ford, before General Motors, was big and dominant, and then General Motors took the market away from them and Ford almost failed.

    It is true that the competitive markets, when there's free entry, are going to be the best protection we can have against the collections of market power. So a very important question then becomes, how easy is it for new firms to enter? And that's what I said before, that in general economists believe that the best barriers to entry are government-imposed barriers. They could be innocent things like patents or they could be government franchises that allow only one firm in some business for some reason. Nevertheless, the government barriers are very difficult to overcome.

    But with most of the other kinds of barriers, firms can usually work ways over top of them and get into industries. When firms can enter, then even firms with market power today will not necessarily have it tomorrow. That's why, as I said, a lot of economists sort of lean towards allowing mergers with significant efficiencies with the feeling that even if there's some market power built, it will be eroded over time through the kind of process you just described.

    What we have to be careful about, and what we have to ask ourselves, is how quickly and how much do we want today's consumers to have to pay for that in the form of higher prices for five or ten years before this firm finally gets beat up by somebody else? That's where we have to go into analysis of the barriers to entry and ask, how easy is it to enter, and are there government barriers that make it more difficult to enter? Maybe we can revisit those. Then at the end we can come up with a conclusion as to whether the temporary harm to consumers is going to be outweighed by the benefits of the efficiencies.

    You're quite right, we think competitive markets are great for innovation. Of course, when a firm has a temporary monopoly position and it's making a lot of money, that's a nice target for people too, so the prospect of being a monopolist for a short while is partly what gets people innovating. You don't want to innovate to jump into a competitive market. You'd like to innovate to go into a position with a little bit of profit for yourself, understanding of course that it will be transitory; if you don't keep innovating, you're not going to keep that profit.

    Mr. Brian Fitzpatrick: A number of years ago, when he was still alive, I heard Dr. Deming argue in favour of monopoly power. I think he used the example of AT&T, whom he had worked for. He said there were a lot of benefits such as long-term contracts and relationships with suppliers in a monopoly-type situation, where you're not looking at the bottom line and chasing the next quarter's return and so on. He said that organization was very innovative and a very successful organization, and it had monopoly power and so on. I thought it was an interesting argument he presented. I think a lot of that has taken root in Japan too, with the way they structure a lot of their companies and the way they do business and so on.

    I'm just going to throw that argument out, that there is a case to be made for monopoly power being a good system. The Lucent people were part of that AT&T system. They made a lot of innovation and so on, and then it got spun out in the deregulation thing and they're in a lot of trouble.

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    Mr. Thomas Ross: Right. This is a question I take up with my students, actually. There have been two models proposed for developing world-leading companies. One is the national champion model, where governments are urged to protect and coddle their domestic firms and let them build into a domestic monopoly. That will make them very big, powerful, and efficient, and that will make them effective internationally when they go to compete.

    The other model is the sort of tough love model, which says, no, make the domestic market just as vigorously competitive as you can, and it's that competitive process that's going to make your domestic firms efficient and adaptable and really ready to take on the world.

    The evidence to this point, I should say, seems to be much more in favour of competition being the major creator of powerful companies rather than having them coddled or protected, although I've heard the arguments you and Deming made many times. They have fallen out of favour in the profession generally, and I think the view is that monopolies tend to have this kind of creeping inefficiency over time, if anything, and that in fact we're all well served by competitive processes and competitive markets.

    The Chair: Thank you very much, Mr. Fitzpatrick.

    Mr. Savoy.

    Mr. Andy Savoy (Tobique—Mactaquac, Lib.): Thank you very much, Mr. Chair, and thank you for joining us today, Mr. Ross.

    Mr. Thomas Ross: Thank you.

    Mr. Andy Savoy: We've had a number of people around the table express concern with the precedent set by the superior case. And as with Larry, I feel it has impacted my region of Atlantic Canada quite substantially.

    We've heard that there's a miscalculation on the deadweight loss by the bureau. In your expert opinion, did the bureau get it wrong? If so, what can you lend to that argument specifically?

    Mr. Thomas Ross: I should begin this by saying that I'm not one of the great experts on the case in terms of going through the file. I didn't work on the case for anyone, which I suppose leaves me freer to speak about it.

    My sense of it is that the bureau did get it wrong. Now, that's not necessarily to criticize the bureau, because it's a little bit of Monday morning quarterbacking. Some decisions had to be made about what arguments would be well understood and appreciated and what would seem too theoretical, abstract, and difficult to convince tribunal members of, and they may have felt they had a strong enough case without getting into it.

    So the issue was really, do we count the fact that there was pre-existing market power? A merger that raises price, say, 5% does a lot more damage to the economy if the price is already uncompetitive than if the price is starting at a competitive level. They were prepared to go with the assumption that price was initially close to the competitive level, and they calculated the harm based on that, which resulted in a gross underestimate of the harm. Again, there could have been many good strategic reasons they thought that was the desired strategy; I wasn't privy to any of those discussions.

    But the fact is, subsequently, people have done analysis and said, well, if we had done it allowing for the pre-existing market power, what would the damage of the merger have been? The damage then turns out to be a number very close to the alleged efficiencies, in which case I'm quite convinced the tribunal would have had no trouble denying the merger, given that the harm, as I said before, in a case like this was so certain because it was a merger to almost monopoly and the efficiencies are always somewhat guesswork. My guess is that the tribunal would have had no trouble turning down that merger. It's easy for me to say, but that's my take on it.

    Mr. Andy Savoy: Thank you.

    Now that we have the situation with a precedent being set by Superior...and I understand your proposal now; you say the existing act, since its inception, can be used and interpreted, and these areas may not occur again. If you look at a cost-benefit or a risk analysis on the status quo, understanding the precedent already being set by Superior and with the proposed amendment changes, could you give me the downside and the upside of both in terms of risk?

    Mr. Thomas Ross: So you're not referring to just this market in particular; you're referring to the economy-wide effects.

    As I say, I think the rule that has emerged from Superior Propane, through the back and forth, has emerged because the tribunal seems to want to push total surplus so hard, but the Federal Court says, oh, but it's not just total surplus. I think the product of that is a rule that's kind of what we call “qualified total surplus”.

    The downside of that is that there will be mergers, with some harm to consumers, that will be allowed to go through. If the harm is significant and egregious, then that's where the “qualified” comes in, and we should be able to do something about those. But for many mergers where we're talking about small price increases or price increases to consumers that are not particularly poorer than shareholders, in those cases those mergers could go ahead.

    Some people would consider it a downside any time consumers are negatively impacted by a merger, and I concede that's a point of view.

    The downside to the amendments is that they could actually stop us from approving mergers that lower prices, because the amendments are such that if significant efficiencies are not passed on, you would block a merger even if the merger would have led to lower prices. That might not happen. It might not happen very much, but that's the downside with that one, as well. Of course, it also introduces a little bit more uncertainty just because it's a new law, but that's par for the course, I guess.

    Mr. Andy Savoy: So you feel that we're better off with the status quo than actually implementing the amendment to the Competition Act, because of that downside.

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    Mr. Thomas Ross: Yes, I do. I'm quite prepared to be convinced, if we have some more cases like Superior and what I viewed as the qualified total surplus standard is not the kind of standard that's developed. Maybe I'll be proven wrong, but right now I'm pretty comfortable with the status quo.

    The Chair: Thank you very much, Mr. Savoy.

    Mr. Crête.

[Translation]

    Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): Thank you, Mr. Chairman.

    Just to be clear on this, the Competition Bureau decided on March 31 not to appeal the latest ruling in the case of Superior Propane. In so deciding, the Bureau noted the following:

While disappointed with the decision of the Court announced on January 31, 2003, the Bureau has concluded that further litigation would not have clarified the efficiency defence.

    Yet, in 1998, the Bureau had said this:

It is our view that the merger of the two dominant firms in the propane industry would result in a serious deterioration of competition, with resulting higher prices to many propane consumers.

    In other words, in 1998, the Bureau believed that filing an appeal was the way to go and now, given the complexity of the situation and the difficulty in proving certain things, it has decided not to appeal. Would Bill C-249 facilitate or complicate the litigation process for the Competition Bureau? For instance, in the case of Superior Propane, could it have moved forward with an appeal had the legislation been in place?

[English]

    Mr. Thomas Ross: I'm not a lawyer, so I don't know what the grounds for a lawsuit would be. But just speaking on the economics of the question, which is probably what you meant anyway, it could be that the decision not to appeal is in part because the bureau has decided--and this would be perfectly sensible, in my view--that given this committee's initiative, it's better to just work to amend the act, that the grounds for appeal were insufficient to get the law to change through a decision of the Supreme Court, and that a better route to improve the law was to seek amendments through this committee process. That's a perfectly reasonable position, from my standpoint.

    What the grounds of appeal could have been, should they have wanted to appeal, I'm really not sure. One of the lawyers you have before you might be better placed to answer that question.

[Translation]

    Mr. Paul Crête: The Bureau said this in its decision:

While disappointed with the decision announced by the Court on January 31, 2003, the Bureau has decided that further litigation would not have clarified the efficiency defence.

    In what way does this amendment clarify the efficiency defence? Basically, that was the purpose of the amendment. The bill might be the right way to achieve this aim, or perhaps there is some other way to go, but the objective is justifiable. In your opinion, can something be done to clarify the efficiency defence, whether it be Bill C-249 which you seem opposed to, or some other option?

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[English]

    Mr. Thomas Ross: Certainly, amendments could clarify the efficiency defence. For example, you could imagine an amendment that just said there must be no consumer harm. That would be quite straightforward. Then the efficiency defence wouldn't actually be a defence, but if you're arguing efficiencies, you would have to argue that they were so substantial that the firm would not want raise prices or otherwise harm consumers.

    There would certainly be ways you could craft an amendment that would get clarity. Would it get clarity and have all the desirable economic properties we would like? I don't know. My preference, as I've said, is that the status quo was quite good. I think this qualified total surplus standard is effectively the law now, and partly the reason why the bureau decided not to challenge, perhaps, is because they figured the Supreme Court would just acknowledge that, and if they're not happy with that, which is understandable, the better route is through legislative change, through your committee.

[Translation]

    Mr. Paul Crête: On the substantive issue, the Competition Bureau believed in 1998 that there were grounds for an appeal. Now it claims to be disappointed with the decision. Because it lacked the required tools, it decided not to intervene in this matter any further and to step back for reasons having to do with form, not substance. Do you share this viewpoint or do you feel that regardless of the tools, the situation could not have been any clearer?

[English]

    Mr. Thomas Ross: Monsieur, I'm very sorry. I did not get any translation of that question.

    The Chair: You'll have to repeat it.

[Translation]

    Mr. Paul Crête: The Bureau decided not to appeal the decision, even though it felt that it had grounds for an appeal. In your view, is it fair that the Competition Bureau lacks the necessary tools to deal with substantive matters? This decision will adversely affect the Competition Bureau's reputation. People will feel that there is no point in going any further given that the Bureau lacks the proper tools to deal with such matters.

[English]

    Mr. Thomas Ross: That is a good question. I guess they could feel that they're in a very difficult place right now. I know these proceedings are expensive for them. They may have concluded that the chance of their getting out of this process what would have made for a better law, from their standpoint, was not great enough to merit the dedication of those resources. They may be optimistic enough about the processes here with your committee that they feel that the law will be improved in what they want this way.

    I suppose I could give you a better answer if I knew what grounds they thought they might have for an appeal. I'm not a lawyer. I'm used to reading cases. I don't see what the grounds would be, but again, I'm not a lawyer. If I knew what the grounds were and I thought addressing them would actually help clarify the law some more, then your point might be absolutely right that maybe they should be proceeding just to get at least the final word out of the Supreme Court on what the current state of the law is before we proceed with amendments.

    The Chair: Thank you very much.

    Mr. McTeague.

    Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Professor Ross, thank you for appearing here today. Obviously, I have a number of questions for you, but I wanted first of all to thank you and compliment you for the extensive work you and Ms. Everett did for us on behalf of the government's request to deal with the treatment of efficiencies in merger review.

    I was interested in a number of your comments with respect to making it important to recognize that competition and efficiency are not one and the same thing. I think you've said that here, and I note it on page 9 of the report. What's interesting, however, is you say at the end of one point that on the one hand, if the merger reduces the number of vigorous competitors or eliminates a particularly effective competitor, it could certainly reduce the competitiveness of the market.

    If I'm to understand the purpose behind an efficiencies defence, it's that we should accept a substantial lessening of competition--it's a trade-off. You accept a potential anti-competitive harm--there will be perhaps irreparable damage to the economy--but there is an efficiency gain that might be translated as a benefit somewhere down the road.

    That's why I put the words in the amendment that the tribunal, under section 93, “have regard to whether the merger or proposed merger has brought about or is likely to bring about gains in efficiency that will provide benefits”--not significant price benefit, but benefits--“to consumers, including competitive prices”. I've suggested that.

    Is the concern you have with the amendment that the test in section 93 is not correct, that we could and should accept, by implication, the loss of a vigorous and effective competitor, as in the case of Superior Propane? If this is the case, then what is the trade-off? Is the trade-off a standard that we understand, or in terms of the comparisons you've made here...? I note--and you'll forgive me for saying this--you pointed out in your conclusion that Canada is really the only nation of the four that you examined that does not have.... I'm going to use your words: none of these jurisdictions has an explicit efficiency defence built into its anti-trust policy the way Canada does; furthermore, none of them applies a total surplus standard.

    In light of Superior Propane, why would Canadians accept a standard that seems to punish consumers, that accepts anti-competitive harms, when no other nation on the face of this planet does?

º  (1620)  

    Mr. Thomas Ross: You ask hard questions.

    You're quite right. Of the small sample of countries we surveyed, Canada is the only one with an explicit efficiency defence. I think there might be one or two others in the world, but not of the major economies. So we are alone that way.

    One thing that's interesting, at least, is that three of the other jurisdictions we surveyed were working to get better treatment for efficiencies in their merger reviews. You might feel we're too generous to efficiencies. They, in general, feel they're not generous enough. So they're coming toward us--you can think of this as harmonization perhaps--and we're moving toward them if we follow this path.

    There is generally a recognition that you want to take efficiencies into account, so my concern with the proposed new subsection 96(1) is partly based on uncertainty. You're referring, I think, to when you make efficiencies a factor, if I'm correct. Then the question is, how big a factor do they have to be? To me, in reading that, it's possible consumers could actually benefit from a merger, but under this revised section, the merger might be disallowed because they won't benefit enough. The costs go way down, and price goes down only a little, and it's viewed that they're not getting sufficient benefit as a result.

    So there is some ambiguity in my mind.

    Apart from that, your broader question of why Canadians should tolerate a system in which consumers are disadvantaged is a good question. The answer just has to be that we are consumers, but we're also producers and workers for firms that make profits and pay us better salaries as a result.

    In general, we benefit and our children benefit by living in an efficient economy. That doesn't mean outrageous redistributions of income should be ignored; the qualified total surplus standard would allow us to address that. But it does probably mean, yes, we'll have to tolerate cases where prices go up, at least for a while. But it's made up for by greater efficiencies.

    Again, I would point to the fact that most economists feel these anti-competitive effects would be somewhat transitory--not so transitory that you ignore them, but competitive markets have a way of correcting. When there's monopoly power, there's a call for new entry. It takes time sometimes, and we have to respect that. But the market power, unless it's backed up by some government sanctions, some government force, is usually temporary.

    Mr. Dan McTeague: Mr. Ross, I appreciate your role as an economist, and you and I have worked on many things in the past. It seems to me rather interesting that our largest trading partner, with which our economy is heavily integrated, would never accept a standard that says that the public interest, or the interests of the consumer...or that there should be a harm that we accept, which in many respects, as in the case of Superior Propane in Atlantic Canada--or in the Yukon, as my colleague Mr. Bagnell has suggested--would mean damage inextricably and irrevocably beyond the ability for someone to come back in.

    If I, as a legislator, and my colleagues here were to accept the argument that Canada should have an act or section that effectively provides for a blueprint for the monopolization of virtually every industry in this country, given the level of integration that we have with respect to other nations, why would we not want to at least consider in this approach...? You're saying that other countries seem to be coming a little bit more toward efficiencies. We tend to be, by all accounts--and I'm reading some of the material by Mr. Ross--at the extreme, using the total surplus example. We're prepared to punish our consumers; we're prepared to live with less competition; we're prepared to have a substantial lessening of competition, which is beyond the wildest interpretation of any member of Parliament here.

    What is it about the total surplus standard that economists feel is so important that Canada should become a test ground, in essence, for something that is obviously an injury to competition, which violates the very essence of our Competition Act, for which the purpose is not only efficiencies but, as I read it, the promotion of the interests of small business, innovation, and consumers? Do we have to amend section 1.1, the purpose of our Competition Act, and say that monopolies, however harmful or dangerous, should be accepted?

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    Mr. Thomas Ross: I appreciate that you're making an extreme case to make your point clear, and that's fair. Of course, under a total surplus standard you won't get monopolies everywhere. Most monopolies would fail a total surplus test. Efficiencies are not that big, especially when you take into account very certain negative effects on competition. You are not going to get many mergers to monopoly that would survive a total surplus test. Again, if the redistributions were shocking or egregious, there would be another way to attack them under the qualified total surplus approach.

    Let me comment on your remarks about the U.S. The U.S. has been, bit by bit, becoming more and more sympathetic to efficiencies. I think there are people there who are jealous of our efficiency defence. At the same time, they don't need an efficiency defence as much as we do.

    Let me say that it's the economists down there, not surprisingly, who like the efficiency defence more than the lawyers. But it's a little bit less important for them because, working in a market that's ten times as big, they can quite often have their cake and eat it too. They can have lots of competition and firms that are big enough to be efficient. In a smaller economy such as Canada, especially in manufacturing, we've had the experience--and we've recognized this for decades--that we're going to have to put up with higher levels of concentration than the Americans would live with, but that's part of being a smaller economy. That does mean that we confront this competition efficiency trade-off. It bites us in a way that it doesn't necessarily have to bite the Americans.

    The Chair: Thank you very much.

    Mr. Masse.

    Mr. Brian Masse (Windsor West, NDP): Thank you for being with us, Dr. Ross.

    Further to some of your testimony, you talked about having to tolerate some of the conditions or the monopolies that we would be faced with. What is the threshold? Also, can I get your thoughts in general that it's not just ordinary consumers--that is, residential or typical Canadians--but it's also other businesses, especially small business and medium business? Say, for example, Superior Propane is an example where you have some industry issues like energy products and other ones that are very dependent upon, for growth and competition, the smaller markets and that. Are there any distinctions that should be made in regard to this amendment, or is there a general tolerance for all those things? I see certain products that are available out there, and the elimination of competition could lead to quite a ripple effect for some of the smaller businesses that are dependent upon some of these concentrations that could make it difficult for them. What would the threshold or tolerance be?

    Mr. Thomas Ross: Yes, that's a very hard question to answer. Certainly small business counts, just like anybody else, and small businesses, of course, are buyers and sellers. And small businesses that merge in small local markets could be on the other side of the table when it comes to a merger review--medium-sized businesses anyway. Of course, in many cases small businesses are more affected as buyers when mergers raise prices that they face.

    There's no set threshold in economic theory above which you start to worry about accumulation of market power. It depends. We often look at market shares, but I think subsection 92(2) tells us not to be too fixated on market shares. We need more in the analysis than that.

    So we would take into account things like barriers to entry. That's the next most important thing, how easy is it for other firms to come in. We should consider maybe foreign suppliers importing into the market, or just from other parts of Canada importing into the market, or new businesses starting up, other businesses expanding into this area.

    So you take the market concentration, together with maybe some information about how those firms behave against each other. For example, if there's been a history of cooperative or collusive behaviour, that's a very bad thing and you'd want to jump all over them, and I wouldn't want to have a merger in an industry with a recent history of collusion.

    But on the other hand, if you have five firms and they're vigorously competing with each other--no one is really making a lot--and there is a merger that reduces it to four, you probably wouldn't be all that worried, especially if the barriers to entry don't seem that dramatic.

    If you look around the world where they've had dominance tests--what sort of market share is required for the authorities to view a firm as becoming dominant, because some countries only worry about mergers once you get to what they call dominance--I think in Europe a number like about 50% market share has been about enough to trigger the European Commission into thinking this is now an area where we have a dominant firm and we're going to block its attempt to grow through a merger. But I'm just throwing that out as an example. It's one of the numbers that you see.

    Now the Canadian bureau has probably tolerated maybe somewhat higher numbers than that for a dominance determination, but that's partly because we don't need to go to dominance to block a merger. The Europeans couldn't block a merger unless they argued dominance, so they have a pretty low threshold of dominance. We can block a merger without dominance, so it's not quite so critical where we draw the line at dominance. It's not really a consideration in a merger case by itself. It's just market power.

º  (1630)  

    The Chair: Thank you.

    Mr. Brian Masse: Earlier you noted the case of Superior Propane and you mentioned waiting for other examples, potentially, before taking any action. How many examples should we wait for, and if that's the case and that's where you get to the judgment call, how much do we tolerate before we see something happen? Is it one, two, three, or is it just a guess as to what would be the trigger point to maybe potentially make some legislation changes?

    Once again, I'm really concerned about the smaller and medium businesses that are really reliant upon particular products and that can really be hurt, and they can't tolerate a lack of competition for some of the things that they need to be successful. And I believe that dissuades some innovation that can be very important for competitiveness in the general sectors, especially in the auto sector where I'm from. It dominates our area with tools and dies, all those types of things. They're seeing very much progress, but it's also based on some sense of stability and protection from some of the things they need to be competitive.

    Mr. Thomas Ross: Yes, that's a fair point.

    My lawyer friends might feel differently, but I would argue that one case could make a difference if it was particularly bad. The reason I don't want us to rush off and amend the law based on Superior Propane is partly that I think the result of Superior Propane may in fact be a usable rule. If the next decision absolutely destroyed that, or if in the next decision there was a shocking redistribution of income that you just could not possibly accept and yet the Federal Court and tribunal allowed it to happen, then you might view that as enough.

    But this decision, partly because of the way it was argued by the bureau--again, it could have been argued differently and they might have won it, possibly at a total surplus test--makes it a bad case to want to rewrite the law over, and then secondly, because maybe the law that's come out is not so bad, I would argue we want to at least wait for another case. If we get a another case that's just shocking in its outcome and was as well argued as it could be by the government side, then I would think you'd certainly have reason to revisit this.

    The Chair: Thank you, Dr. Ross.

    Mr. St. Denis.

    Mr. Brent St. Denis (Algoma—Manitoulin, Lib.): Thank you, Chair, and thank you, Professor Ross, for being here.

    I have two questions, if I have time.

    My first question is predicated on whether you saw or read the testimony of the competition commissioner that we heard on Monday.

    Mr. Thomas Ross: I read it once.

    Mr. Brent St. Denis: My first question relates to helping us less experienced participants here in competition law. The commissioner's testimony, as I understand it, came out on the side of the amendment proposed--either the original or revised version, if I understood correctly. I've heard your very eloquent testimony not in support of the amendments. I wonder if you could explain in your own words the difference between how you see it and how the commissioner of competition sees it. That would be very helpful, to me anyway.

    Mr. Thomas Ross: The commissioner is passionate about this, and that's to his credit. He takes the view that on his watch he doesn't want consumers harmed. He views--and this is a legitimate perspective--his role as maintaining competition, I think, for competition's sake. As an economist, I see competition as a means toward efficiency, and therefore I am prepared to trade off competition in the interests of efficiency, and I know that under extreme situations he would be too.

    I don't mean to make a caricature of him, but this is broadly our difference. He just feels that as the commissioner of competition it's his job to see that competition is served in every market in every situation. As an economist looking at this, I just see competition as an instrument and the goal as efficiency. That then suggests different answers to these questions.

    Mr. Brent St. Denis: That is a succinct answer.

    My second question is a sort of philosophical question, because fundamentally this is about distribution or redistribution of wealth. The more that industry or creators of goods can capture the marketplace, either by innovation, law, or whatever, the less wealth presumably gets to the citizen, so to speak--to the consumer, very generally. If we allow for full competition, in a perfect world presumably the consumer will get the maximum benefit of the capital involved in that industry, whereas if we go to the other extreme and allow the industry to have full effect of efficiency, presumably there will be less benefit; the redistribution of wealth will be less to the consumer.

    We have a tax system that allows us to redistribute wealth, so with the tax system and a social safety net--welfare, etc.--we have the means through other instruments to redistribute wealth. Should governments not take the opportunity through competition law to add to the redistribution of wealth because tax systems are imperfect? Where do you draw the line between how good your other instruments are versus the instrument that may be available to you here to move the redistribution bar or standard higher?

    Am I making myself clear?

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    Mr. Thomas Ross: You are making yourself very clear, and it's a great question.

    It's a good response to people like me who say, let's just worry about the total surplus most of the time, because after all, we have other people to worry about distribution. It's a very good response to come back to us and say, yes, but the rest of this distribution doesn't necessarily work all that well. If you suddenly hammer somebody with a brand new tax in the form of a high price for propane or some product, there's no guarantee that they're going to get any kind of compensation.

    So in principle, yes, we broadly do some redistribution through the tax system. But if we're going to really hammer somebody, we need some way to redistribute to them, and the tax system doesn't do this. That's a fair response.

    In my defence and in defence of the people on my side, we don't like the idea of every government agency getting into the redistribution business, because they can then start to work at cross-purposes. You get benefits afforded to you from competition decisions, benefits afforded to you by the Minister of Finance because of your income, and benefits afforded to you from some other office because of your single parent status. To most economists, having a whole bunch of different government offices all worried about redistribution doesn't seem to be the efficient way of worrying about the welfare of Canadians up and down the socio-economic ladder.

    That's why I'm sort of comfortable with this compromise position. If the redistribution is not that shocking—if it's a relatively small price increase on people who are not terribly disadvantaged or poor—and if we think that it's going to be temporary because there will be new entry within a few years, then you would put up with consumer harm. However, the qualified total surplus approach does say that, if you're really going to hammer somebody because of this price increase, then we're not going to count on some eventual redistribution through the tax system. We're going to ask for relief right now, either in the form of promises not to raise prices—and then you can maybe proceed—or if you don't want to do that, then you just block the merger.

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    The Chair: Mr. Normand, and then I will go back to Mr. Fitzpatrick for the last question.

    Mr. Normand.

[Translation]

    Hon. Gilbert Normand (Bellechasse—Etchemins—Montmagny—L'Islet, Lib.): Mr. Ross, how can the government justify wanting to control competition, when certain levels of government, primarily the provincial and federal levels, enjoy a monopoly over alcohol, airport and postal rates and so forth? How can we possibly legislate in this area when we are the ones holding the monopoly?

[English]

    Mr. Thomas Ross: I have many students who ask me that question, and I wish I had a better answer.

    It is true that one of the old arguments of the Chicago school of economics was that the only monopolist you really needed to worry about was the government, because its monopolies were durable and well enforced by the power of the state. Of course, governments do support monopolies in a number of areas, for a wide variety of sometimes very good policy reasons. But I think that we just take these one at a time. We have monopolies on liquor distribution, perhaps because we feel that's the way we optimally control excessive alcohol consumption. We have monopolies on electricity, or we regulate it, because we want to control the price to vulnerable consumers.

    I guess every problem has its unique policy prescription. One of the nice things about competition law is that it is a kind of a regulation—but what I call the soft-regulation framework law, which is a relatively simple set of rules that apply across the economy and, hopefully, generate a lot of benefits at a fairly low cost.

    Mr. Brian Fitzpatrick: Can I pick up on that point raised by my honourable friend here? But before I do that, I just read the “Oracle of Omaha”, Warren Buffett's letter to his shareholders this year. He commented that as a long-term investor, he avoids investing in companies that are preoccupied with mergers and acquisitions because they have a dismal record of success in the long run.

    But I want to pick up on the point that was raised here. You mentioned that the American economy is so big that it has many advantages from a competitive standpoint. In 1988, I believed or thought that we were getting into the free trade agreement and that the Canadian economy would enjoy all the benefits of this very competitive American economy, and that side of the equation. But when I look at the Canadian economy today, whether banking, transportation, publishing, culture, communications, food marketing, and so on, I have to say to myself that it looks to me as if government itself has created a whole lot of monopolistic and market domination situations in this country and is really working against the benefits of a competitive free enterprise economy. In a lot of those sectors, it is government that is the problem and the source of the monopoly-type problems we have, and of the inefficiencies that go with them in the economy.

    I'm just curious. Do you have any comment or observations on this sort of problem, or am I off base on it?

    Mr. Thomas Ross: No, you're not really off base on it.

    Again, governments have lots of good reasons for involving themselves in the economy at various places. In the west generally, there has been a significant shift of governments out of the economy through privatization and deregulation efforts. That has been quite noticeable in some countries, particularly dramatically in the U.K. and a little bit less so in Canada. But we've still had significant privatization and deregulation. So the government is retreating a bit from this. There is no doubt that the government still involves itself in lots of markets. In each case, it has a good reason, which doesn't mean it's a good enough reason to do it. But there is some policy objective being pursued there.

    I also want to pick up on your point about what effect the free trade agreement has had on us. It is true now that a lot of markets in Canada should not be viewed as Canadian from a competition standpoint; they should be viewed as North American. To have 100% of the Canadian market may not be worth anything if there are a whole bunch of American firms lined up at the border ready to ship to your customers the minute you raise prices by one cent. So for many markets, we do at least have to take this North American perspective.

    But it's also true that a lot of markets are national or local for some reason. Sometimes it's because of government policies, as you pointed out. Sometimes it's just because of transportation costs or cultural differences. Despite the fact that our American and Canadian economies are quite integrated, it's still amazing how much trade flows across the country, going further distances than it could if it went across the border to the U.S. Goods flow across Canada at a much greater rate than they flow across the border into the U.S. There is still a Canadian economy, and there'll be many markets for a long time in which our integration with the U.S. does not really alter the competitive dynamic of those markets. Now, in most of manufacturing that's probably not true anymore, but in lots of service industries the markets are not going to be national or international but more localized. And we're going to have the possibility of competition problems, which our American colleagues might not have because of their denser population and ability to cram more efficient-sized firms into any given market.

º  (1645)  

    The Chair: Thank you, Mr. Ross.

    I know that you have to run to classes. I'd like to thank you very much for being with us today and for giving us some insight on Bill C-249. Thank you very much, and have a good day.

    Mr. Thomas Ross: Thank you, too. It's been my pleasure, Mr. Chair. Thank you.

    Some hon. members: Hear, hear!

    The Chair: That concludes our meeting for today. The meeting is adjourned until Monday.