Critically examining redistribution claims in competition policy

For over half a century, competition law thinkers in Canada and elsewhere have made the argument that competition law should not be designed with the purpose of ensuring a fair and equitable distribution of economic resources. In plainer terms, the focus of competition law should not be to ensure fair prices for consumers or fair wages for workers. Rather, competition law should be focused on promoting the efficiency of the economy, recognizing that what may be an efficient business behaviour, like mergers that create economies of scale and other cost savings for businesses, may also enable businesses to charge higher prices for consumers or offer lower wages to workers. In short, competition law is about growing the economic pie, not how it should be split between people within our society.  

The argument continues: distributional concerns are very important and valid. However, it should be the responsibility of the tax and transfer system to address these problems, not competition law and policy. There are three broad arguments people provide as to why distributional concerns should be delegated to the tax system. First, this area of policy is more closely directed by politicians, who are in a better position that those enforcing competition law to make so-called normative judgements about what is a fair distribution of economic resources. Competition law should concern itself only with ostensibly positive concerns like the efficient operation of the economy. Second, if competition law is saddled with multiple and potentially conflicting objectives, like promoting the efficient operation of the economy while also ensuring economic equity within it, then competition law may be rendered ineffective because its stated purposes are in conflict with each other. Lastly, proponents of the argument assert, generally without any empirical evidence to back up the claim, that the tax and transfer system is simply a better, more effective tool for addressing equity concerns.     

The canonical articulation of this argument in the Canadian context came from the 1969 Interim Report on Competition Policy, published by the Economic Council of Canada (which was disbanded in the 1980s).  The Council acknowledged that their view diverged from “popular thinking” that competition policy ought to be concerned with the distribution of income and economic power (Economic Council of Canada, 1969). In response, it argued the following:

“This concentration on one objective [efficiency] is not meant to imply a necessary disparagement of other objectives, such as more equitable distribution of income and the diffusion of economic power, which have been entertained for competition policy in the past. It is simply that we believe:

  • That a competition policy concentrated on the efficiency objective is likely to be applied more consistently and effectively; and
  • There exist more comprehensive and faster-working instruments, particularly the tax system and the structure of transfer payments, for accomplishing the deliberate redistribution of income and the diffusion of economic power, to whatever extent these are thought to be desirable” (Economic Council of Canada, 1969, p. 19-20).    

Since the late 1960s, this line of thought has been repeated for so long by so many people that it’s essentially been accepted as fact. One modern example of this argument being invoked can be found in Professor Edward Iacobucci’s issue paper for Senator Weston’s consultation on competition law reform. For example, he asserts that “[t]o accept that economic redistribution matters, for example, says little about whether the Competition Act ought to account for redistribution – income taxation, and government spending, for example, are two alternative mechanisms for economic redistribution that are better targeted and more systematically effective at redistribution than the Competition Act.”

Professor Iacobucci goes on to devote several pages to an analysis that aims to show the pitfalls of assigning multiple objectives to competition law in addition to the promotion of economic efficiency: “it is insufficient to accept the social importance of non-economic values to argue that the Competition Act ought to account for them. The correct question is whether competition policy, and the Competition Act, ought to include multiple objectives within the Act, or whether multiple policy instruments ought to account for the variety of objectives at stake in certain conduct.”  

What I’m going to call the “growing-the-pie” refrain – the idea that competition law should focus on growing the economic pie while the tax system should be responsible for splitting the spoils – poses to major problems. First, it has been used to justify dysfunctions within our competition policy system. The argument has been used to justify the generally lax approach we take to competition law in Canada, the most notable example being our efficiencies defence for mergers (and non-criminal competitor collaborations, too). It’s also been used to justify the insular, technocratic approach that Canada has taken over the decades in the development and enforcement of its competition laws. This segregation of competition law from other policy areas and priorities has led to a fragmented industrial policy where competition law has become out of step with the economic priorities of our current government, such as fostering inclusive growth. Going forward, we need to take a whole of government approach that understands the reality that competition law intersects with multiple policy priorities. Ignoring this reality doesn’t make our policies better. Rather, it makes them incongruent.   

The second problem with the growing-the-pie argument, which is frankly the most frustrating to me, is that it is based on an unconsidered understanding of our modern tax system that hasn’t evolved since the mid-1960s. In fact, I think it is fair to say that the growing-the-pie argument isn’t based on any empirical evidence at all, both in modern debates and going back to the Interim Report. I have never seen anyone who makes the growing-the-pie argument cite even basic numbers illustrating that the tax and transfer system is more effective at ensuring an equitable distribution of economic resources than measures to mitigate market power and prevent inequitable distributions of economic resources in the first place.

Market power is a mechanism for inequality, and it seems reasonable to think that by mitigating it we can, at least to some extent, make our economy more equitable without having to rely so heavily on expensive transfer programs. When markets are less competitive, firms have greater market power. With this market power, firms can get away with charging higher prices for the goods they sell and paying workers less than what they should be getting based on their productivity. For example, based on figures from the OECD report Inequality: A hidden cost of market power, absent excessive market power in the Canadian economy, the incomes of the poorest 20% of Canadians could be 20% greater and the wealth held by the top one percent could be 24% lower. Keep in mind, this study only considers market power in product markets, not market power in labour markets which can supress wages. Therefore, this number may be an under-estimate. (Furthermore, the authors point out that several of the assumptions made in the study likely result in conservative estimates.)

More moderate thinkers in the competition policy space have also acknowledged that competition law has a role to play in addressing inequality. For example, in his piece Antitrust in a time of populism, Carl Shapiro asserts that “stronger antitrust enforcement will modestly help address income inequality” but that the “role of antitrust in promoting competition could well be undermined if antitrust is called upon or expected to address problems not directly relating to competition”, particularly if it is put forward as the only or primary policy intervention. And I generally agree with this view.

The question of whether the tax system is a more effective instrument for fostering economic equity than the Competition Act is an empirical one. So, I decided to explore some numbers to get at the relative cost of addressing inequality through competition law versus tax and transfer programs. We don’t have a lot (if any) research that quantifies how toughening up competition law by X amount decreases markups in product markets or markdowns in labour markets, but we do know that market power exists in these markets to some degree. Despite this research gap, we do have some relatively accessible methods for estimating how changes in market power could impact government programs, which can give us a sense of the relative costs of the tax system versus the implementation and enforcement of competition law.

Estimating government costs of labour market power

To start, I used Statistics Canada’s Social Policy Simulation Database/Model (V29.0) to run some simulations with the aim of answering the following question: if there were a hypothetical decrease in labour market power across the economy, leading to higher wages, how much money could the federal government save in transfer programs? I produced some simulations for 2022 and the results are summarized in the table below.

Table 1: Federal program savings due to employment income increases, 2022

Employment earnings increase ($)percentage increase relative to CCB earnings averageCCB savings ($M)GST/HST credit savings ($M)CWB savings ($M)Total savings relative to Competition Bureau’s budget

The first column of the table gives the increment by which I increase the annual employment income of all individuals that live in families that receive at least on of the three benefits presented in the table. I based these amounts on a percentage increase of the average annual employment income of a recipient of the Canada Child Benefit (CCB), which according to the data in the SPSD is $29,851.

If everyone that lived in a family which received either the CCB, the GST/HST credit, or the Canada Workers Benefit (CWB) were to receive an additional $149 per year in employment income, which relative to the average employment income of a recipient of the CCB is less than the typical inflation rate over the last decade, the government could expect to save about $52.7M in CCB payments, $16M in GST payments, and $3M in CWB payments. To total sum of the savings to these programs is equal to about 90% of the Competition Bureau’s entire budget, assuming that the budget will be $80M after accounting for the increased funding it is expected to get from the most recent federal budget. As employment income increases, the amount paid out in the CWB also increases given the structure of the program. Benefits are phased in at a rate of 27% percent up to the maximum benefit amount before being phased out with the objective of maintaining work incentives.  

Another way to look at the relative costs of competition law enforcement and transfer programs is to explore the counterfactual where labour market power increases and wages become smaller (in real terms). In Table 2, I present numbers for several scenarios where employment earnings for recipients of at least one of the three transfer programs decrease by a lump sum.

Table 2: Federal program cost due to employment income decreases, 2022

Employment earnings decreases ($)CCB costs ($M)GST/HST credit costs ($M)CWB costs ($M)Total costs relative to Competition Bureau’s budget

The core reason why even slight changes to employment incomes at the lower end of the income distribution have large cost impacts, relative to the amount that we spend on competition law enforcement, is that these programs are massive in comparison. The CCB is the most expensive of the three programs, totalling about $23B in benefits paid per year based on the SPSD/M results (which jives with the total spending reported in previous budgets). For context, the value of the Rogers-Shaw merger is about $26B, and is the largest deal ever challenged by the Bureau.

It’s also worth noting that these simulations do not include the provincial versions of child benefits and sales tax credits, many of which are also geared to income. If we were to consider these programs as well, the cost savings associated with marginal decreased in labour market power would be even greater. 

The numbers presented in the table highlight a reality of transfer programs relative to more regulatory government interventions like competition law: writing cheques to individuals is expensive if you plan to do it on a large scale. In comparison, competition law has greater potential to be a more scalable intervention. While greater enforcement dollars are necessary if governments want to challenge more instances of anticompetitive behaviour that exacerbate market power and undermine economic equity, deterrence effects may allow the Bureau to have a greater impact with fewer dollars spent. In essence, competition law can do less with more because the intervention is about providing oversight in markets, not issuing payments to recipients.   

Clearly, the increases and decreases in employment earnings presented in Tables 1 and 2 are somewhat arbitrary. First, for the first table, there are people in this simulation that may not be in the labour force but are still receiving some additional employment income. But second, and more conceptually, it is unlikely that if we were to adequately enforce competition law in our labour markets and enact laws that fully addressed market power issues in these markets that every recipient of these benefits would receive (or lose) an additional $149 dollars per year from their employers. The blanket increases and decreases in people’s employment incomes is not realistic and is meant to be illustrative. However, there is reason to believe that the markdowns in some labour markets can be substantial, suggesting the possibility that there is scope for some employers to be paying much more.

For example, Yeh, Macaluso, and Hershbein (2022) find that in the US manufacturing sector found that markdowns in labour markets – the difference between a worker’s productivity and their wage – vary. However, on average workers receive $0.65 for every additional (marginal) dollar generated by their firm.

Another way to think of the relative cost effectiveness of redistribution programs to competition law and enforcement is to examine the costs of these programs on the margin. Part of the problem with this method is that we don’t know the marginal benefit of an additional dollar spent on competition law enforcement or an additional unit of stringency in competition law. However, given the design of the programs outlined in Table 1, we have a pretty clear idea of the marginal benefit of reduced labour market power for these programs.

For the CCB, benefits are reduced by between 3.2% and 23% per dollar of employment income, depending on the composition of the family. Thus, for families that have incomes in excess of the phase-out threshold, which is about $32,000, the government gets to save between $0.032 and $0.23 for every dollar of employment income they earn. Likewise, the reduction rate for the GST/HST credit is 5%, meaning that for an additional dollar of employment income the federal government gets to save $0.05 in program costs.

Competition policy and cost savings in poverty reduction

So far, I have been focusing on the interplay of market power in labour markets and redistribution programs. Given the structure of redistribution programs at the federal level, the link between these programs and competition in labour markets is clear. Furthermore, the relative cost effectiveness of competition law and redistribution are clearer to articulate from a labour-market perspective.  

However, there are also important implications of market power within product markets that impact the prices for goods and services. While market power in product markets impacts nearly all households, a particularly relevant outcome of higher prices for the federal government is their impact on the poverty line.

In 2018 the government established Canada’s official poverty reduction strategy, which committed reducing poverty by 50%, relative to 2015 levels, by 2030. Along with this new strategy was the establishment of Canada’s official poverty line, the Market Basket Measure (MBM). The MBM is based on the cost of a basket of goods and services that, in principle, are required by families to meet their basic needs and have a modest standard of living.

Currently, the government spends tens of billions on mitigating poverty and servicing its costs on society and the economy, with the CCB, CWB, and the Guaranteed Income Supplement for seniors pulling a lot of the weight. Another major driver is the Canada Social Transfer, which transfers billions of dollars from the federal government to provinces to fund social assistance programs, as well as other services like post-secondary education and child care. So, finding ways to reduce the cost of poverty reduction interventions would be beneficial to taxpayers and the long-term viability of the government’s finances, especially given the high-inflation and high-interest rate era we are entering.    

To explore how mitigating market power in product markets could make poverty-reduction spending more efficient, I create another simulation using data from the SPSD/M. In these scenarios, I estimate the poverty reduction impact of a lower cost of living and summarize these results in Table 3.

Table 3: Impact of poverty line reductions on poverty rates (MBM – 2018 base), 2018

poverty rate (%)individual poverty count (M)census family poverty count (M)price reduction (%)total value ($M)average total value by census familyTotal value relative to Competition Bureau’s budget
11.044.00 2.500N/AN/A 
10.693.87 2.400.1% 125 51.83 1.56
10.663.86 2.400.2% 249 103.72 3.11
10.653.86 2.400.3% 373 155.55 4.66
10.623.85 2.390.4% 496 207.37 6.20
10.603.84 2.380.5% 618 259.26 7.73
10.473.79 2.361.0% 1,222 518.75 15.28
10.083.65 2.292.5% 2,924 1,279.19 36.55
9.553.46 2.185.0% 5,519 2,531.54 68.99
8.953.24 2.067.5% 7,717 3,745.56 96.46
8.393.04 1.9510.0% 9,542 4,882.07 119.27

The poverty rate figures resulting from this data are much higher than the most current poverty rates because the most recent microdata that are publicly available to do these calculations are from 2018. However, the simulations are still illustrative despite being somewhat out of date.

The numbers presented in the “total value ($M)” column show the total monetary value of reducing the poverty rate of a magnitude reflected in the column titled “price reduction (%)”. So, hypothetically, if instead of reducing the poverty line by 0.1% the government were to write a cheque to every census family 0.1% under the poverty line that would bring them above the poverty line, the total cost of this initiative would be $129M. On average, the value of that cheque would be $51.83.

Similarly with the simulations on the labour side, changes to the cost of goods and services resulting from reductions in market power may be minimal, but if widespread could have large monetary impacts, relative to the cost of coemption law enforcement. Again, it may be overly simplistic to assume that stiffer competition law and enforcement could lead to consistent decreases in the prices for all goods and services captured in the MBM. However, there is reason to believe that there are markups resulting from market power that, if addressed, could lead to lower prices within the realm of the numbers presented in Table 3.

For example, the recent initiatives taken against price fixing schemes in both the sale of bread and beef suggest that prices for these products have been inflated my a notable amount. A study that I mentioned before, Inequality: the hidden cost of market power, suggest that when examining sector-specific markups, the average excess markup of products is approximately 7.6%. The notorious merger case involving Superior Propane and ICG propane in 1997/98 was challenged by the Competition Bureau on the basis that it would increase the cost of propane, which for some families is a critical shelter cost. Experts estimated the price increase in propane, post-merger, to be in the universe of 8%. With these numbers in mind, it may not be unrealistic to expect that by reducing market power in Canadian markets there is the potential to reduce the poverty line by a few percentage points, potentially generating value of hundreds of millions (which is several orders of magnitude greater than the budget of the Bureau).    

The need for an all-of-government approach for competition law reform

In a piece for the National Post, Vass Bednar and Denise Hearn make the case of an all-of-government approach for dealing with the competition concerns raised by digital giants. But even beyond the digital sphere, policy makers need to approach the review of the Competition Act with an understanding that the law intersects with very many areas of government and government priorities, including but not limited to poverty reduction.

Continuing as we have for the last half-century – under the assumption that competition law can somehow be designed and implemented in insolation from other government programs and priorities –is unrealistic and costly. More fundamentally, this approach leads to the government developing a suite of incohesive programs that work against each other, leading to profound inefficiency and waste from a fiscal perspective. The numbers I present here paint this picture from the perspective of some of Canada’s major social programs, but there may be other instances where competition policy works against current federal programs, leading to waste. Programs supporting small- and medium-sized enterprises come to mind. The potential outcomes of a competition law that is out-of-step with other government priorities and programs is ironic given that the stated aim of the growing-the-pie argument is to enhance efficiency, not create inefficiency.          

I imagine that some may argue that despite the potential costs to government of the growing-the-pie approach to competition law, the approach is still valid because competition Law has a comparative advantage, or unique ability, to promote efficiency. That is, while competition law may be a more cost-effective (although not complete) method for addressing inequality, if one had to chose, they should still choose to have competition law focus exclusively on promoting efficiency.

Perhaps, in terms of its own effectiveness, competition law is relative more effective at promoting efficiency than fostering economic equity (e.g. Ma, 2016).[1] So while enhancing competition in labour and product markets may lead to millions in cost savings for the government, promoting competition with the aim of efficiency could enhance GDP by billions (and by extension increase government tax revenues).  

Lucky for us, we actually don’t have to choose between only promoting efficiency or only promoting equity. We can have our cake and eat it too. The way we reconcile these two priorities is through the concept of inclusive growth, whereby we pursue economic growth alongside the equitable distribution of the economic gains of that growth. Equity is not considered an afterthought, but a core consideration of economic and industrial policy.

As part of the Canadian Inclusive Economic Initiative, the report No Country of San Franciscos: An Inclusive Industrial Policy for Canada by Mathew Mendelsohn and Noah Zon describes inclusive industrial policy, and inclusive growth, very well:

“The goal should not simply be to support the growth of successful Canadian companies. If our industrial policies build great companies that contribute to inequality and wealth concentration, they will have failed. Our industrial policy needs to support economic growth, innovation and successful firms in a way that delivers widely-shared economic, social and environmental value.”

For competition law, one of the most direct ways of ensuring that economic value is widely shared is by fostering rigorous competition. When firms face little competition and have access market power, they can capture the gains of economic growth for themselves, preventing those gains from being enjoyed by consumers in the form of lower prices or from workers in the form of better wages and work quality. However, greater levels of competition, fostered through more rigorous competition law, can keep market power in product and labour markets under control.

There is also the reality that different sub-populations in our society have different experiences of market power, particularly when it comes to labour markets. For example, women may face a higher degree of monopsony power given, on average, their lower elasticity in labour supply. Labour market frictions that lead to the lower elasticity may be driven by societal expectations that women accommodate their spouses’ carriers over their own or take greater responsibility for childcare and other domestic duties. In this way, monopsony power is a contributing factor to gender pay differences and enable firms to set discriminatory wages. A 2009 study done on the waged of women in Norway found that 70% to 90% of the gender wage gap experienced by high school–educated women can be attributed to monopsony power. For women with a college or university degree, this number ranges from 20% to 70%.

A competition law that fosters inclusive growth must consider the different realities of diverse workers and consumers. Specifically, tests for anticompetitive conduct should not be limited to evaluating harm at a market-wide level, like is currently the case with our “substantial lessening or prevention of competition” test for civil conduct. Rather, the law needs to consider competitive harms that occur at the level of the individual by adopting presumptive standards or by evaluating conduct by the nature of the conduct (per se), not it’s market-wide effects.  

Competition law have a critical role to play in promoting inclusive growth in Canada. OECD recommended in it’s 2017 report to the federal government Policies for Stronger and More Inclusive Growth in Canada that the government implement an institutional mechanism to “review existing and proposed public policies, identify those that unduly restrict competition and revise them by adopting more pro-competitive alternatives, where feasible without jeopardising other policy objectives such as inclusiveness.” To that end, with the review of the Competition Act beginning, the legislation should be re-examined with an eye to enhancing competition without undermining other objectives towards economic fairness and inclusion.

Re-examining assumptions and the need for competitive markets

In light of the review of the Competition Act, it’s time for policy makers and other thinkers in the competition law space to think critically about the assumption that competition law is about promoting economic efficiency while the tax system should be responsible for the equitable distribution of economic resources. 

Over a half century has passed since the Economic Council made the claim that distributional and economic fairness concerns are best addressed by the tax system. Since that time, our entire social welfare system has evolved profoundly. Some of the largest transfer systems at the federal level have been implemented since that time: the GST credit was introduced in 1986, the Canada Worker’s benefit in 2007, and the Canada Child benefit in 2016 (SPSD/M Parameter guide). The government is spending tens of billions more in transfer programs, in real terms, than it was fifty years ago.

To manage programs costs while also delivering the greatest benefit to recipients, we need to be fostering competitive and fair markets. Transfer programs are a critical tool for addressing poverty and redistributing economic gains to families on the lower end of the income distribution. However, they lack the power to create fair markets where workers are able to find good quality employment with fair pay and where consumers are able to access goods and services at fair prices. If we want to address poverty and other forms of economic inequity at the root, and empower people with autonomy and the ability to achieve their own success, we need to design a competition law with the aim of fostering fair and equitable markets.

[1] In fact, while I haven’t looked up the budgets for the many other programs that may be impacted by the negative impacts of market power, I suspect that competition law enforcement is much less expensive than may other types of government interventions geared to supporting  

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