Vass Bednar is the executive director of McMaster University’s master of public policy in digital society program and an adjunct professor of political science. Denise Hearn is a senior fellow at the American Economic Liberties Project.
The House of Commons standing committee on industry and technology is currently conducting a study on the productivity of our small and medium-sized enterprises, with a focus on competitiveness and the reform of the Competition Act.
As Ottawa looks ahead to consulting on a modernized act, it must rethink the unfair terms of trade that currently favour dominant firms and commit to fixing a series of loopholes, in both digital and traditional markets, that hurt consumers and independent businesses.
To do so, policy makers should learn from current case studies. Consider the U.S., where PayPal-owned mobile payment service Venmo is instituting mandatory arbitration clauses in its consumer contract. This contract term requires that parties resolve their disputes through an arbitration process instead of going to the court. Forced arbitration processes have been criticized for being secretive, limiting the complainant’s legal rights and often requiring them to pay large up-front fees to file a complaint.
In Venmo’s case, the only way to opt out of mandatory arbitration is to physically mail the company a written notice. And if Venmo changes the agreement terms in the future, the opt-out doesn’t hold. At that point, customers are given one final option: Accept our terms or close your account.
While Venmo is only available in the U.S., Canadians are similarly at the mercy of the bank-owned INTERAC e-Transfer payment system, which also prescribes arbitration for settling disputes, as do many large Canadian companies. Such take-it-or-leave-it contract terms are known as “contracts of adhesion,” and they are increasingly common across the economy.
These terms illustrate how stakeholders, such as consumers, workers and businesses, are increasingly on the wrong end of an asymmetrical bargaining position in markets. And while many provinces have used their consumer-protection laws to shield consumers from binding arbitration clauses, these protections do not extend to businesses and commercial dealings.
Independent businesses often navigate coercive, unfair or unclear contract terms with dominant buyers largely on their own – some of which are anti-competitive. These one-sided contract terms can be used to silence stakeholders (as with non-disclosure or non-disparagement clauses), limit legal options or rights (with mandatory arbitration or class action waivers), impede fair dealings (with exclusive dealing arrangements or tied selling), restrict the freedom to set prices (with no price-competition clauses) and extract profits or information (with mandatory disclosure of sensitive business information).
But it isn’t just contracts – dominant players now dictate the terms and conditions of trade in supposedly “free markets.” As it stands, entrepreneurs must navigate a series of competition issues imposed by digital gatekeepers that are near-invisible to the consumer.
For example, independent businesses that sell on a tech platform-based marketplace deal with gatekeepers who continually increase the “tolls” they charge to sellers and suppliers. Etsy sellers recently went on strike and closed online stores in protest over rising transaction fees. Meta recently announced it would take a 47.5-per-cent cut of all digital assets sold in its metaverse platform – an astounding percentage that will leave far less for artists, developers and creatives. And Amazon now makes the largest amount of its revenue from seller fees, which have risen consistently every year, and recently hit sellers with a 5-per-cent “fuel and inflation” surcharge.
These tolls act like private taxes on markets, and in the absence of adequate competition legislation and enforcement, smaller players have little leverage to refuse them.
But despite rising fees, platforms are not taking responsibility for challenges that businesses have consistently complained about such as copycatting, counterfeit products and fake reviews. Not to mention platforms such as Google and Amazon self-preferencing their own products, making it near impossible for smaller companies to compete. Platforms are not neutral commercial spaces; they are markets shaped by rules. Those rules are now set by private regulators.
And tech platforms aren’t the only ones. In sector after sector, entrepreneurs and businesspeople cannot access markets on fair and equal terms because of dominant gatekeepers that stand in between businesses and their customers, or artists and their fans.
If you are a musician, the vertical integration of Live Nation/Ticketmaster has created a stranglehold on performance venues and ticket sales. If you are a grocery store supplier, you must contend with the grocery retail oligopoly of Loblaws, Empire and Metro, which have saddled smaller businesses with “compliance fees” for late deliveries beyond their control from supply chain constraints. If you are a restaurant owner, high tolls and manipulative behaviour from dominant delivery platforms such as GrubHub, Uber Eats and DoorDash nearly bankrupted your business during the pandemic. Many business owners are justifiably afraid of speaking out for fear of retaliation.
As competition policy regulators have mostly stood idly by over the past few decades, the competitive playing field has moved from selling in open markets to gatekeeping over markets. Innovation, business dynamism and startup rates all suffer as a result. This means that businesses no longer compete based on producing better quality goods and services, but rather through the aggregation of market power through endless mergers and acquisitions – which hit a record high in Canada in 2021.
Even when dominant companies do seemingly beneficent things for businesses, it can still serve their interests. For example, the largest corporations also regularly participate in entrepreneurial ecosystems, and may offer cash grant equivalents of their products and services. While this undoubtedly benefits small businesses, it also locks them into the incumbent’s services and prevents other providers from competing. As one entrepreneur told the Access to Markets initiative: “I would love to offer thousands of dollars’ worth of free cloud storage credits to startups, but that would bankrupt my business.”
Because of such threats to startups in Canada, achieving a dynamic, fair and resilient economy demands an all-of-government commitment to clarifying the terms of trade for firms of all sizes. The government needs to consult directly with small business owners and entrepreneurs to understand the various ways that their access to markets may be restricted. Further, the Competition Bureau should conduct a market study into contracts of adhesion – and the effect of terms such as mandatory arbitration on independent businesses.
Given the complex and changing nature of commercial transactions, reviewing, updating and expanding Canada’s approach to competition to accurately reflect the needs of small and medium-sized businesses is a necessary step to lowering transaction costs and achieving better affordability for Canadian consumers and entrepreneurs alike.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.