Archived — Occasional Paper Number 7: Competition Policy as a Dimension of Economic Policy: A Comparative Perspective

by Robert D. Anderson and S. Dev Khosla, Industry Canada, May 1995


Summary

This Paper examines the relationship between competition policy and wider economic policy objectives relating to industrial restructuring and international competitiveness. While the primary focus is on Canada, the Paper also discusses the competition law and policy regimes of other major industrialized economies. In addition to existing policies, the Paper considers a number of issues relating to the future role of competition policy in the globalizing economy of the 1990s.

The Paper has seven parts. Part 1 introduces the issues and highlights the growing interest in the role of competition policy and its relationship to other economic policies in Canada and elsewhere. This interest derives from a growing recognition of the importance of microeconomic framework policies as determinants of economic growth and development; an international trend toward privatization and deregulation in the past decade; and a concomitant strengthening of competition laws in Canada and other countries in recent years. In addition, increasing globalization and recognition of the role of technological change in economic growth and development have prompted interest in the application of competition policies toward new forms of business arrangements, and the complementarity of competition policy with international trade and industrial policies. These developments provide the background for the Paper.

Part 2 examines the role of competition policy in light of economic literature on productivity and industrial performance as well as the structure of the Canadian economy. It points out that the role of competition policy is based on economists' understanding of the optimizing properties of competitive markets. It also discusses recent research by Michael Porter and others, indicating that vigorous competitive rivalry in domestic markets for goods and services fosters the upgrading of firms' ability to compete internationally. This supports the complementarity of competition policy and other policies designed to foster efficient industrial structure. While freer international trade has helped to discipline the exercise of market power, the Paper shows that it has not allayed the need for a vigorous domestic competition policy in most markets. This part of the Paper also reviews pertinent empirical literature on the structure of the Canadian economy and refers briefly to various institutional aspects of an effective competition policy.

Part 3 outlines key elements of Canada's present competition legislation and policy particularly as they relate to industrial restructuring. The discussion indicates that the goal of fostering efficiency is incorporated in several key provisions of the Competition Act. To begin with, the purpose clause of the Act, which guides its application, refers specifically to the objective of promoting the efficiency and adaptability of the economy and expanding opportunities for Canadian participation in world markets, in addition to the more traditional competition policy objective of ensuring competitive prices and product choices. The substantive provisions of the Act -particularly, the merger provisions -provide gateways for the realization of efficiency gains while preserving an appropriate emphasis on fostering competition in relevant markets.

The merger provisions also recognize the role of foreign competition in domestic markets as well as other factors (such as the existence of failing businesses) that are relevant to industrial adjustment. These factors have been applied in various cases under the Act. Part III also notes recent decisions of the Supreme Court of Canada that have upheld the constitutional validity of the Act and have thereby reinforced its role as a cornerstone of the market economy in Canada.

Part 4 discusses the connections between competition policy and other economic policy fields. The analysis indicates that competition policy plays an important role in complementing diverse policies that have the objective of fostering an efficient and dynamic economy. These include intergovernmental arrangements relating to internal trade, industry-specific regulatory reform and privatization, intellectual property and innovation policy as well as international trade liberalization. Competition policy may also be regarded as an essential element of an effective industrial policy — to the extent that such policy is defined broadly to include the various measures through which governments pursue an efficient and dynamic industrial structure. By the same token, a key contribution of competition policy to national economic welfare lies in challenging potentially anticompetitive manifestations of industrial policy such as restrictive trade measures or market reservation through regulation.

Part 5 constitutes a brief survey of competition policy and its relation to broader economic policy issues in various foreign jurisdictions -notably the United States, the European Community, the United Kingdom, Germany, France and Japan. Specific developments in Sweden, Australia and several other countries are also noted. Each of these jurisdictions provides useful insights into the role of competition policy as a dimension of economic policy in the globalizing context of the 1990s.

The survey of foreign jurisdictions indicates that competition policy is an increasingly important aspect of economic policy around the world. This is particularly evident in European jurisdictions, where competition policy is playing a central role in the forging of a unified European market. It is also apparent in Australia and various emerging market economies, where efforts are under way to strengthen the role of competition policy as an aspect of broader economic reform. In the United States, antitrust policy remains a cornerstone of the market system. Even in Japan, long regarded as favouring an interventionist approach to industrial policy, competition policy is being strengthened in response to international pressures to facilitate access to the Japanese market.

The survey also suggests that there has been at least a partial convergence toward economic efficiency as the core objective of competition policy in the OECD economies. It shows that Canadian competition legislation and enforcement policies are no less liberal with respect to industrial restructuring than those of other major industrialized countries. Indeed, the Canadian model represents a flexible, market-oriented example of competition policy that compares favourably with the other jurisdictions considered in the survey.

Part 6 examines a number of issues regarding the future application of competition policy in Canada. Some of these relate to: the application of the Competition Act with respect to industrial restructuring and new forms of business arrangements; the international dimensions of competition policy; and institutional and process issues.

With regard to industrial restructuring, the issues considered include: the treatment of dynamic efficiency gains and rationalizing mergers; the joint venture and specialization agreements provisions of the Act; and the treatment of new business arrangements such as strategic alliances and industrial networks. The conclusion here is that the existing legislation generally provides an appropriate balance between competition and efficiency-related factors. The challenge for competition authorities lies in staying abreast of developments in economic theory as well as in the marketplace, to facilitate effective application of the various provisions of the Act.

As for the international dimensions of competition policy, this Part of the Paper takes note of the various efforts under way to facilitate international cooperation in competition law enforcement, and the factors prompting consideration of the scope for international convergence in competition policy, generally. It also comments on the potential usefulness of the Canadian model of competition policy in providing technical assistance for emerging market economies in various parts of the world. Finally, with regard to institutional matters, the Paper touches briefly on issues relating to the role of private parties in competition law enforcement.

Part 7 provides concluding remarks. It observes that competition policy is playing an increasingly central role as a dimension of economic policy in Canada and elsewhere. This reflects fundamental developments in the economy and economic policy environment, such as growing recognition of the importance of interfirm rivalry in promoting dynamic change and competitiveness. Canadian competition legislation, policies and institutions are generally well adapted to meet the challenges that the stronger role for competition policy will entail. In Canada and elsewhere, a key challenge for competition authorities will be to participate effectively in extending the scope and reach of competition policy principles in related fields of economic policy while maintaining appropriate independence and impartiality in the core function of competition law administration.

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