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Robin Shaban, principal economist at Vivic Research.

Handout

Robin Shaban is principal at Vivic Research, an economic consulting firm that provides data-driven research for policy makers and advocates.

Rogers and Shaw issued a joint communique on Monday announcing their intent to merge, a deal totalling $26-billion, including debt. The two companies also claim the merger will create $1-billion a year in synergies within two years after it is finalized.

Their synergies claim is interesting because, if upheld, it will severely hamper the Competition Bureau’s ability to take meaningful action to protect competition in the industry, further contributing to the high prices Canadians pay for telecommunications services. The core problem is Canada’s so-called efficiencies defence for mergers, contained in Section 96 of the Competition Act.

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Unlike most other jurisdictions on the planet – many of which have their own efficiencies defence for mergers – ours lets companies undertake mergers that will harm competition if a union creates efficiencies that are “greater than and offset” the harm the merger causes to competition.

In other words, if a merger creates a significant amount of cost savings, it is legal under Canadian law, even if it hurts consumers. These cost savings often come from laying off staff, which may exacerbate the harm these mergers can inflict on Canadians. Ultimately, the increased revenues from higher prices and cost savings accrue to business owners and shareholders, exacerbating economic inequity.

The history of the efficiencies defence can be traced back to a 1969 report issued by the Economic Council of Canada (since disbanded). In it, the council argued the only goal of competition policy should be to promote and protect economic efficiency, not to protect consumers – or prevent concentrations of economic power, for that matter.

The report said if a merger created greater efficiency on a net basis, the merger should be permitted under the law. The council argued that sometimes the quest for greater efficiency, such as economies of scale, can come at the cost of fairness and equity, such as fair prices. In these cases, efficiency should take precedence over fairness.

This line of thinking was imported from the United States, inspired by the right-wing, pro-free-market Chicago School of law and economics (based at the University of Chicago), which was taking root around that time. The Chicago School argued for lax enforcement of competition laws in the belief that market forces could address most competition problems in the long run, and those views revolutionized competition policy in the U.S. and Canada.

However, modern research by American scholars, among others, has begun to demonstrate the Chicago School’s approach to competition policy has not been particularly effective. For example, Dr. Fiona Scott Morton and the Washington Center for Equitable Growth have created a database of more than 150 research papers, many of which show “evidence of significant problems of underenforcement of antitrust law” in the country. Canada has yet to see the same level of research in universities and think tanks, although interest may be growing.

In highlighting the estimated $1-billion in annual synergies, we should expect Rogers and Shaw to make an efficiencies argument to the Competition Bureau. And if the synergies generated from the merger are even remotely close to $1-billion per year, it’s very possible the argument will be successful and lead to an unprecedented consolidation in the telecom industry.

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One of the most controversial merger cases in Canadian history shows us how the efficiencies defence can lead to profound consolidation of markets and, in some cases, monopolization. In 1998, Superior Propane Inc. acquired ICG Propane Inc., both of which operated propane-distribution networks. The merger was allowed because of the efficiencies defence, and it created monopolies in 16 communities across Canada, and near monopolies (80-per-cent market share or more) in 32 communities. After the merger, Superior Propane controlled about 70 per cent of the entire Canadian retail market for propane.

Propane was a common source of home heating for low-income families living in rural communities, and the merger was calculated to increase propane prices for these families by about 8 per cent, resulting in $40.5-million more in annual revenue for Superior Propane.

Despite the price increases, the merger was permitted because it created an estimated $20.2-million in annual efficiencies for the next 10 years. Part of the cost savings resulted from job losses, totalling about 200. These efficiencies outweighed the estimated inefficiency caused by the higher propane prices (what economists call the deadweight loss) of just $3-million a year, according to math presented at litigation.

Assuming that the Rogers-Shaw merger will create $1-billion a year in synergies, there may be little the Competition Bureau can do to take serious action against the deal. However, Parliament’s standing committee on industry, science and technology has committed to explore reforms of the Competition Act. This review is an opportunity for Parliament to revoke the efficiencies defence and make other positive changes to Canada’s Competition Act that are based on modern empirical evidence, not armchair economics of the 1970s.

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