In looking at industries dominated by a few powerful players, the focus is typically on the effect on consumers. For example, how a handful of national grocers decide the price of bread.
The consumer angle is important, but there is another pernicious effect of market domination: small enterprises get trampled under the feet of their larger rivals.
Elevated levels of corporate concentration have eroded Canada’s economy by stifling innovation, discouraging entrepreneurs and tilting the playing field. Ottawa has an opportunity to address this by making it a key priority in the upcoming reform of the Competition Act.
Small businesses are a huge driver of Canada’s economy, if you add them together. There are 1.3-million businesses in Canada, and 98 per cent of them are small, defined by Statistics Canada as having fewer than 100 employees. They employ a collective 63 per cent of Canadians.
About 0.2 per cent of businesses have more than 500 employees. And yet their influence on the economy is massive.
They grow, in part, by buying each other up. For example, there were 353 mining companies listed on the Toronto Stock Exchange in 2008, with an average market value of $585-million; by 2017, there were 224 mining companies with an average market value of $1.3-billion, according to research from Yelena Larkin and Ray Bawania at York University. The pandemic’s record-low interest rates fueled even more deal-making.
This concentration hits small businesses in many ways. There is the direct competition for consumers (think of your local bookstore versus Amazon). There is concentration among a small business’s suppliers (think of a small grocer who may only be able to source pork products from the two major makers, Maple Leaf or Olymel). And there is concentration among a small business’s buyers (think of a manufacturer of consumer goods trying to get their items on a shelf at Walmart or Costco).
Save Small Business, a community of 33,000 small- and medium-sized businesses, surveyed its members recently and found more than half felt their competitors were bigger than they used to be. About 60 per cent felt they had less power to set prices or terms. Two-thirds felt the future of their businesses would be decided by the large players in their industries.
Increasing levels of concentration have been supported by Canada’s lax competition regime. But Ottawa’s ongoing review of the Competition Act can help to correct that.
As this space has argued before, eliminating the efficiencies defence for proposed mergers would act to discourage market concentration. The resulting greater competition would help consumers, but it would also benefit small business by limiting the market power of big competitors.
Another reform would be to modernize the Competition Bureau’s notification system. Currently, if a deal is worth $93-million, or the combined Canadian assets of the companies are worth more than $400-million, the parties must notify the bureau before the deal closes.
This focus on transaction size alone makes little sense, since it ignores the effect of multiple small purchases. This is relevant in markets targeted by so-called serial acquirers.
In the veterinary industry, for instance, corporations have bought up more than a quarter of all practices in a series of small transactions over the last decade. The number and aggregate total of transactions should be as important for the bureau to monitor as the size of any one deal.
It could also monitor market share, as other countries do. The klaxon could sound when one company accounts for more than 30 per cent of a market, for example, as in the United States and Britain.
Lastly, Canada should align itself with U.S. competition law in what is known as “structural presumptions” in evaluating whether a deal that results in increased market share will be bad for Canada’s economy.
This would shift the onus on the merging parties to explain why such a deal would not be harmful, rather than the bureau having to prove that it is.
The fairly permissive competition regime that came out of the 1980s was premised on the idea that creating Canadian giants would allow them to step more powerfully into global markets. Instead, these giants have stomped on their domestic rivals. The playing field needs to be levelled.