Consumers usually get the best value when businesses are exposed to the threat of competition. Aside from the new firms threatening their incumbent status, established businesses tend to have less incentive to cut costs/prices and also improve services. The threat of entry by competitors curtails the firms in such ways that encourage consumer welfare.
Have it in mind that healthy competition among businesses encourages innovation and gives the ability for new entrants to compete in the market. A market void of competition stifles innovation, and Canada has been plagued by withering entrepreneurship rates and weak business dynamism since the 1980s.
Canadian firms usually spend less on R&D when compared to their counterparts in other developed countries. According to some business experts, this is attributed to a low-risk appetite within Canadian firms, a smaller national market size, and high corporate taxes. But the main reason is that when large incumbents lack competition, there is little or no need to innovate or self-disrupt.
Lack of competition is practically bad for capitalism, and if capitalists fail to fix these issues, others who are more suspicious of commerce’s central role in a functional society will do so for them. Note that competition is very important in sustaining a successful and flourishing ecosystem of innovation in Canada.
What are the Biggest Monopolies in Canada?
Monopolies are companies that tend to take advantage of the consumer. In Canada, below are some of the biggest monopolies;
Table of Contents
- Air Transportation
- Mail Delivery
- Urban Transit
- Government Regulation
- Ownership of a Key Resource
- Economies of Scale i.e. Natural Monopoly
- 1. Dominance
- 2. Market definition
- 3. Market Power
- 4. The practice of Anti-competitive Acts
- 5. Exclusionary Conduct
- 6. Disciplinary Conduct
- 7. Business Justifications
- 8. Substantial Anti-competitive Effects
- 9. Remedies
- 10. Illustrative Examples
Aside from the fact that foreign investment in telecommunications and broadcasting is restricted, non-Canadian firms can’t as well enter the cell phone and television markets. The Canadian wireless telecom industry is concentrated, with the big three (Rogers, Bell, and Telus AKA “Robelus”) collectively capturing an estimated 88.7 percent of the market.
Banking in Canada is being controlled by the Big Five (TD Bank, RBC, Bank of Nova Scotia, Bank of Montreal, CIBC) and 4 of those 5 have taken over independent investment banks and asset management firms in recent years to perfect their assets to enormous proportions, even relative to US banks.
Canada’s airline market is a duopoly with WestJet and Air Canada controlling almost 85 percent of the market between them. Note that just as in the Canadian telecom industry, non-Canadian carriers are prohibited from carrying passengers between Canadian cities.
Canada Post is renowned as the only service available for mail delivery in the domestic-letter market. It was believed that the cost of postal services was increased. However, being the sole service available, consumers have no other choice but to use the service.
ABInBev and Molson Coors maintain a duopoly and control 63 percent of the beer Canadians drink (including Becks, Budweiser, Corona, Miller, and seemingly smaller brands such as Granville Island Brewing). These beer names are different and have different compositions to give a different taste, while they belong to a single company.
Almost every provincial government in Canada (including Quebec and Ontario) gives monopoly licenses to intercity bus providers on certain routes. Consumers are hostages to the interests of the only company allowed to offer those services. Since users of intercity buses are disproportionately from the poorest groups of Canadian society, limiting competition will be so difficult.
Luxottica is a very popular company that owns the major brands of sunglasses. This company has acquired almost all the major eyewear brands. This creates an illusion in the customer’s mind that it has a wide range of sunglasses to choose from, even though those sunglasses are manufactured by one company. Note that Luxottica produces more than 80% of eyewear worldwide.
Apple and Samsung are known to account for almost 81 percent of all Canadian Smartphone sales.
Top Causes of Monopolies in Canada
There are various factors that can cause a monopoly to emanate. A good number of these factors have to do with barriers to entry. Barriers to entry are the basic factors that can make it very challenging or impossible for new firms to enter a relevant market.
The government is one of the major causes of monopolies in Canada as they restrict market entry by law (e.g. through patents or copyright laws). Governments are known to operate monopoly services that prohibit competition in some sectors such as electricity generation and distribution, alcohol retail, urban transit, and domestic mail (for small letters).
They believe this is ideal to serve the public interest, especially since these regulations promote innovation and development (R&D). Firms can be rewarded for their R&D efforts by obtaining exclusive rights to sell their products.
Without this form of protection, it would be more reasonable for many firms to let others conduct their own research and copy their products once they are on the market. However, this would more or less discourage all innovation and research.
Some of the most notable examples of government-regulated monopolies can be found in the pharmaceutical industry. It tends to take years for companies to develop new drugs, if they succeed, the firms can apply for a patent and become the sole seller of the new drug for a period of time.
Ownership of a Key Resource
A business that has exclusive control or ownership of a key resource can limit access to that resource and create a monopoly. Have in mind that the limited availability of the key resource will make it impossible for new firms to gain market share in the industry.
While this factor is pertinent in economic theory, monopolies barely ever emanate for this reason in reality anymore, especially since most resources are available in various regions across the globe. One very good example of a monopoly that came as a result of ownership of a key resource is the diamond market in this twentieth century.
Within this period, the company De Beers entirely controlled most of the world’s diamond mines, either through direct ownership or exclusive agreements. Owing to that, De Beers had the leverage to dominate the market and also influence the market price.
Economies of Scale i.e. Natural Monopoly
There are instances where a single firm can supply goods or services at a lower cost than two or more firms could. Experts refer to this as a natural monopoly (it is a result of no government intervention). Natural monopoly can emanate in industries where firms are known to deal with high fixed costs but are able to attain significant economies of scale over the necessary range of output.
Some circumstances would warrant decreasing average total costs as output increases, and this makes it more challenging for new firms to enter the market.
A good example of this monopoly is the market for electricity. Aside from the fact that Governments in Canada tend to operate monopoly services that prohibit competition in sectors such as electricity generation and distribution, building the infrastructure to supply a city with electricity is very expensive.
The market has high barriers to entry. Connecting an additional house to the power grid is considered cheap as long as the infrastructure is in place. Therefore, a single firm can supply a whole city at a lower cost than two or more competing companies could.
The Enforcement Guidelines to Control Monopolies and Oligopolies in Canada
On March 7, 2019, the Competition Bureau (Bureau) published new Abuse of Dominance Enforcement Guidelines (2019 Guidelines). Note that these guidelines supersede the Bureau’s previous guidelines (2012 Guidelines) on sections 78 and 79 of the Competition Act (Act) and set out the Bureau’s approach to these sections of the Act.
The Bureau’s analytical approach can be broken down into three stages. First, the Bureau assesses whether a firm (or group of firms) is dominant. Second, it determines whether the conduct under review amounts to a practice of anti-competitive acts. Third, it assesses whether the impugned acts have or are likely to substantially prevent or lessen competition in a market.
Dominance is established by reference to the relevant product and geographic market and by analyzing whether one or many persons hold market power in that market. Howbeit, the Bureau recognizes that it is not always possible or necessary to conduct a market definition exercise (e.g., if a firm is dominant under all plausible definitions) to assess dominance.
2. Market definition
Note that the Bureau’s framework to define the relevant market remains the same in the 2019 Guidelines, but additional comments are provided on new market definition considerations, reflecting the Bureau’s 2018 report on big data:
- Multi-sided platforms. One or both sides of a multi-sided platform may now be defined as the relevant product market. When conducting a hypothetical monopolist test on such platforms, the Bureau tends to consider the relationship between demand, feedback effects, and changes in profit on all sides of the platform.
- Free services. When a firm provides its services for free (e.g., a multi-sided advertising platform willing to attract users), the hypothetical monopolist test may be adapted to assess non-price dimensions of competition (quality, innovation, etc.).
3. Market Power
After the relevant market has been defined, the bureau analyzes whether the allegedly dominant firm or firms hold the required level of market power in such a market. The 2019 Guidelines require the existence of a “substantial degree of market power”, instead of the broader “market power” requirement of the 2012 Guidelines.
However, to identify such a degree of market power, the Bureau makes use of direct evidence of supra-competitive pricing or profitability or, if not available, market shares and barriers to entry.
Showing the TREB rulings, the 2019 Guidelines state that a firm that does not compete in a market may still substantially or completely control that market, for example by holding power to exclude current or potential competitors. Market shares may not be relevant in such cases.
- Market Shares and Barriers to Entry. The 2019 Guidelines indicate that market share data is often used as an initial screening mechanism to assess market power. The Bureau’s approach has slightly changed since 2012 in that respect: Removal of the 35 percent “safe harbor” threshold, generally no further examination below 50 percent, and No final market definition.
- Ability to Exclude. Just like it was mentioned above, the Bureau’s comments on the ability to exclude are new. They have been incorporated in the 2019 Guidelines to reflect the TREB rulings and provide for cases where a firm does not compete in the market where the alleged anti-competitive effects are incurred, but is dominant in an adjacent market and has the ability to control the market where the effects occur. According to the Bureau, an ability to restrict other market participants’ output and profitably influence price, notably through the control of important inputs or effective business rules, indicates market power.
4. The practice of Anti-competitive Acts
Anti-competitive acts are defined by their intended negative effect on a competitor, but the Bureau notes that they may not always be specifically directed at competitors (e.g., an act targeting the competitive process in itself can also amount to an anti-competitive act).
As indicated in TREB FCA, once a firm does not compete in the market where the alleged harm is occurring, the firm is expected to have a “plausible competitive interest” in negatively impacting this market. The 2019 Guidelines provide significant comments on two categories of anti-competitive acts:
5. Exclusionary Conduct
The 2019 Guidelines came with additional guidance on three types of exclusionary conduct:
- Exclusive dealing. This type of conduct happens when supply is restricted to certain versions of a product, or when a supplier prohibits purchases/sales of products from/to competitors. Note that it may be explicit or implemented through most-favored-nation (MFN) clauses or other contractual practices. The 2019 Guidelines recognize that exclusive dealing is not always anti-competitive.
- Tying and bundling. This type of conduct happens only when products are sold together or as a condition of purchasing another product. To determine if this conduct is anti-competitive, the Bureau may consider resulting efficiencies and the existence of separate customer demand.
- Refusals to supply. When a competitively significant product or service is being denied and cannot be otherwise feasibly obtained, the Bureau still reserves the right to conclude that the refusal was for exclusion purposes.
6. Disciplinary Conduct
Have it in mind that this category of the anti-competitive act was not discussed in the 2012 Guidelines. Disciplinary conduct more or less relates to actions to discourage competitors from competing more vigorously, or from disrupting the market. This includes pricing below the acquisition cost or the punishing of deviations from a coordinated conduct between competitors.
To determine whether a practice’s purpose was disciplinary, the Bureau will look for evidence of subjective intent. Nonetheless, as disciplinary conduct may be hard to distinguish from the true vigorous competition, the Bureau will still have to investigate such conduct in limited circumstances, mainly when the alleged conduct is prima facie disciplinary.
7. Business Justifications
A business justification for an alleged anti-competitive act it is believed might provide an alternative explanation for the overriding purpose of that conduct. As stated by the Competition Tribunal in TREB, compliance with a legal requirement may constitute a proper business justification.
The 2019 Guidelines explicitly state that the allegedly dominant firm has the burden to prove a business justification in support of the conduct under review, preferably using contemporaneous evidence asserting its motivation. Also note that the Bureau will assess whether alternative methods existed to achieve the firm’s business objective, and will examine the reasonably foreseeable consequences of the conduct.
As stated in TREB FCA, there is no need for the Bureau to quantify the efficiencies resulting from anti-competitive acts, but such efficiencies (qualitative or quantitative) will be considered by the Bureau in assessing any business justifications that are advanced.
8. Substantial Anti-competitive Effects
According to the 2019 Guidelines, adequate prevention or lessening of competition happens when a practice causes a materially greater degree of market power to exist, through new or increased market power, or the preservation of existing market power.
Remember, no threshold is provided by the Bureau regarding substantiality, but a smaller market power increase may be enough if the dominant firm already exercises a high degree of market power. The Bureau may leverage qualitative and quantitative evidence and might conduct the counter-factual test using direct evidence or natural experiments. To do so, the Bureau will consider the effects on prices and output, but also on innovation.
Have it in mind that the Bureau encourages voluntary compliance with the Act, and will often negotiate settlements through registered consent agreements. However, when the Bureau believes a party has engaged in abuse of dominance and consensual remedies are not appropriate or possible, it may make an application before the Competition Tribunal for a remedial prohibition order or other prescriptive measures.
Respondents of course have the right to defend such applications. Notably, AMPs for abuse are a controversial topic. The Bureau organizes AMPs as complementary remedies that serve the purpose of promoting compliance with the Act, and says it wants to ensure they do not become a “cost of doing business”.
But to determine whether an AMP is appropriate, the Bureau will consider the respondent’s collaboration with the Bureau, its compliance history, its intent, and other factors set out in subsection 79(3.2) of the Act.
10. Illustrative Examples
The last part of the 2019 Guidelines provides 10 new practical examples illustrating the Bureau’s updated analytical framework. Note that these examples cover topics like the mere exercise of market power, market definition, joint dominance, predatory pricing, exclusive dealing, tied selling, trade association rules, and disciplinary conduct and are helpful illustrations of the Bureau’s approach.
Monopolies and the barriers they come with tend to lower the living standards of Canadians especially since these protected firms have few incentives to improve efficiency, cut costs and satisfy consumers. If governments across the country want to improve the living standards of Canadians, they should seek ways to curtail or undo the harm caused by the barriers they have already erected to competition.