Strengthening Canada’s economy through pro‑competitive policies

A step-by-step guide to competition assessment

August 20, 2020

Table of Contents

Introduction

Competition is a key catalyst of growth and innovation in the Canadian economy. A competitive marketplace empowers consumers and drives businesses to become more productive, improve product quality, and decrease prices. This attracts new investment, stimulates the creation of high-skilled jobs, and fuels the competitiveness of Canadian businesses abroad.

The Competition Bureau (Bureau), as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. As part of its mandate, the Bureau promotes and advocates for the benefits of competitionFootnote 1 based on the guiding principle that competition is the best way to improve choice, lower prices, and spur innovation in the Canadian economy.

Government policy is central to driving competition. That is why the Bureau works with regulators and policymakers (collectively, policymakers) to assess the competitive impact of new and existing policies and regulations (collectively, policies) and champion the essential role of competition in the economy.

Why is competition so important to preserve? How can policy goals be achieved while being minimally intrusive to competition? When will policies have the most significant impact on competition, and what mitigation strategies are available?

To help answer these questions, the Bureau has developed this Competition Assessment Toolkit (Toolkit) for policymakers. The Toolkit, based on the Bureau's experience and international best practices,Footnote 2 outlines the importance of competition in driving economic growth, innovation, and productivity, and provides a step-by-step guide to identify policies that may impact competition.

The Toolkit is designed to assist policymakers in identifying competition issues at an early stage, and then make use of the resources available to them—including the Bureau—to tailor policies appropriately to maximize the benefits of competition to the economy. If you would like to discuss this Toolkit or have questions about particular policy proposals, please contact our Competition Promotion Unit.

Competition assessment at a glance

Step 1: Identify the policy

A competition assessment should be conducted when a new policy is proposed or an existing policy is reviewed.

Step 2: Assess whether the policy impacts competition

Does the new or existing policy have the potential to limit:

  • The ability for businesses to enter or expand in a market or operate across borders,
  • The ability for businesses to set the price, quality, and quantity of the products or services sold,
  • The incentive for businesses to compete vigorously, or
  • The potential for consumers to switch between competing businesses?

Step 3: Identify alternatives to address policy goals, if necessary

If one or more features of the policy could restrict competition, assess whether those restrictions are:

  • Necessary: Are the restrictions necessary to achieve a legitimate policy objective?
  • Cast narrowly: Are there feasible alternatives that would pose less harm to competition?
  • Proportionate: Do the benefits of the policy outweigh the harm to competition? 

Step 4: Implement the best alternative

The policymaker should implement the alternative that achieves the policy goal in the most competition-friendly manner based on the best available evidence.

Step 5: Conduct an ex-post assessment

Following implementation of any policy, policymakers should monitor its marketplace effects and adjust as necessary.

Why competition is important

Competition is the rivalry between businesses that makes them work harder to win customers. Businesses can compete with each other along a number of different dimensions, including with respect to price, by offering new and innovative products and services, and by improving quality by finding new and better ways of bringing products and services to market. All of these forms of competition benefit Canadian consumers through lower prices, more choice and higher levels of product quality.

Competition further empowers consumers by delivering the variety of products and information necessary to make informed choices. Competition is the positive force that allows Canadians to choose those products and services that are best for them and their families.

More broadly, competition is central to Canada's economic health. Competition drives economic growth, innovation, and productivity—all of which are significant factors in increasing the wealth and prosperity of all Canadians.

Competition:

  1. Leads to lower prices, greater consumer choice, and higher levels of quality.
  2. Empowers consumers.
  3. Stimulates productivity, economic growth, and innovation.

Competition leads to lower prices, greater consumer choice, and higher levels of quality

When faced with intense competitive rivalry, successful businesses will lower their prices, expand their product ranges, and invest in better production methods. Footnote 3 Every business in a competitive marketplace seeks to maintain a value proposition that is at least as attractive as that of its rivals; failing to do so will result in lost sales, a sinking market position and, potentially, that business' ultimate exit from the market. For consumers, this means better products at more affordable prices.

Competition and lower prices: deregulating natural gas

In the mid-1980s, the Government of Canada, through an agreement with the provinces of British Columbia, Alberta, and Saskatchewan, deregulated the natural gas marketplace.Footnote 4 Prior to this agreement, the natural gas industry was government-controlled, where prices and production were not always able to adjust fluidly to changes in supply and demand.

Following deregulation, prices fell dramatically, and natural gas production spiked. In constant dollars, the price of natural gas fell from $8 per unit in the early 1980s to roughly $3 per unit in the late 1990s, as producers engaged in price discounting to undercut their rivals. Over that same period, production of natural gas in Canada nearly doubled to meet demand at these lower prices. Competitive forces in this marketplace powered the development of additional value for consumers.

Competition empowers consumers

Competitive markets empower consumers by allowing them to choose the products and services that best meet their needs, at a price they are willing to pay. Competition drives greater choice and easier comparison between products and services, allowing consumers to make informed choices and hold businesses accountable.Footnote 5

Competition and empowering consumers: open banking

In a 2016 study of the retail banking market, the United Kingdom Competition and Markets Authority (UK CMA) found that banking customers in the United Kingdom faced substantial barriers to switching between providers, resulting in low levels of customer engagement and poor competition.Footnote 6 To empower consumers with greater choice and better information, the UK CMA required banks to implement an open banking standard that would more directly connect consumers with the information they need to choose the product that is right for them.Footnote 7

The UK CMA conservatively estimates that these reforms will generate economic benefits of between £150 million and £250 million per year. In addition to these direct gains, it expects "very substantial dynamic benefits…through increased pressure on banks to improve their quality of service, to innovate and to compete on prices."Footnote 8

In December 2017, the Bureau published its market study "Technology-led innovation in the Canadian financial services sector".Footnote 9 In this study, the Bureau similarly recommended that policymakers embrace "open" access to systems and data through application programming interfaces as a means of spurring innovation and giving consumers greater control over their personal data.

Competition stimulates productivity, economic growth and innovation

International studies consistently link higher levels of competition with more positive economic outcomes.Footnote 10 The competitive process drives continuous improvement, by ensuring that those businesses who can produce the most output with the fewest inputs will thrive, while releasing those less equipped to other productive uses in the economy. This effect ensures higher economic productivity, which increases the wealth and economic well-being of Canadians.Footnote 11

Businesses also innovate more when faced with greater competitive pressure.Footnote 12 This is known as the "innovation imperative", where firms must innovate in order to remain competitive with their domestic and international counterparts.Footnote 13 Absent competitive pressures, businesses have a lower drive to develop new products and find new ways of doing business. With competition, innovation is an essential part of every business' planning.

Competition and economic growth: Australian competition reforms

In the mid-1990s, governments in Australia embarked on a substantial overhaul of the country's competition policy. This initiative modernized Australia's economy by increasing competition policy scrutiny of some industries, and deregulating and extending competition in others.

According to a National Inquiry, these reforms contributed significantly to a 13-year economic expansion in Australia.Footnote 14 Of particular note, these reforms were directly responsible for increasing Australia's GDP by 2.5 percentage points per year. This represents tens of billions of dollars in increased wealth attributable to an economy-wide focus on greater competition.

How to conduct a competition assessment

Given the importance of competition, policymakers should consider the impact that polices could have on the competitive process, and attempt to minimize any negative effects. Competition assessment helps policymakers identify and understand the effects that proposed policies could have on competition.

Policymakers are generally subject matter experts—specialists in understanding how to achieve the public policy objectives with which they are charged. However, even the most well intended and carefully crafted policies can bring about unforeseen or unintended consequences. One way to avoid such a situation is to analyze the likely impacts of proposed policies, relying on other subject matter experts to appreciate how specific wording choices can translate into behaviours and conduct in the real world.

Policymakers can support a stable, productive, and growing economy by incorporating competition assessment into policy impact analysis. Competition assessment engages policymakers to contemplate the effect that policies may have on the competitive process in an industry. Similar to other governmental assessments, like gender-based analysis and environmental impact review, such evaluations can help policymakers expose and avoid unintended consequences of policies.

In committing to competition assessment, policymakers take a positive step to maximizing the economic well-being of Canadians.

A competition assessment includes five steps:

Step 1: Identify the policy

A competition assessment is conducted when a new policy is proposed or an existing policy is reviewed. The first step of a competition assessment identifies the why and the how of a policymaker's preferred approach. This involves specifying the underlying goals that the policy is designed to achieve, and the instrument(s) that a policymaker will use to achieve those goals.

Policy objectives: liquor industry policy

Alcohol products are highly regulated across Canada. These policies often exist to promote responsible social outcomes, and better control the sale and use of intoxicating products. However, alongside such legitimate policy goals, liquor regulation can also have the effect of limiting competition and the marketplace behaviour of those who produce, market, and sell alcohol products.

The Bureau has long been an active voice in ensuring the correct balance between responsible liquor policy and restrictions that may severely restrict competition. Recently, the Bureau has been a leading voice in ensuring that policymakers target provincial liquor rules at legitimate policy objectives, and correctly balance potential social harms while providing sufficient scope for competition and innovation to determine marketplace outcomes.Footnote 15

Step 2: Assess whether the policy impacts competition

In the second step of a competition assessment, a policymaker should enumerate any restrictions that the policy will place on business conduct and analyze how its policy approach will affect competition.

But what does it mean for a marketplace to be "competitive"? What should a policymaker be looking for when assessing if a policy will impact competition in a marketplace?

There are four central indicators of a competitive marketplace. These indicators are rooted in international best practices, and are the results of decades of economic research. When assessing if a new or existing policy impacts competition, policymakers should ask how the policy may impact these four indicators.

Markets are most competitive when:

Businesses can easily enter and expand

When a business faces formidable rivals, it must continually innovate, improve efficiency, and keep prices low. Obstacles that make it more difficult for businesses to enter into or expand in a market or operate across borders, called barriers to entry, diminish competitive intensity.

Barriers to entry can come from many sources. Barriers to entry that exist within a market can be beyond the policymaker's control, for example, due to high start-up costs and capital requirements, patent and copyright restrictions, economies of scale, and access to distribution channels. However, policymakers can also create barriers to entry with policies that limit the ability for companies to enter a market or operate across borders. Examples include situations where businesses obtain exclusivity rights, licensing or permit requirements, zoning restrictions, and trade barriers.Footnote 16 Increasingly, outdated policies can also create barriers to entry for new and innovative business models in industries facing rapid technological advances.

Barriers in context: technology-led innovation in the Canadian financial services sector

In the financial services sector, many consumers still face instances where service providers require a 'wet' signature, verification of identification or collection of personal information in person or through a face‑to‑face conversation.

These rules and policies may have made sense when transactions occurred in person at a branch, but the Internet and mobile computing have changed how consumers wish to consume services—and how providers provide them.

In December 2017, the Bureau published its market study "Technology-led innovation in the Canadian financial services sector".Footnote 17 In this study, the Bureau recommended that regulation should be technology‑neutral and device‑agnostic. This can accommodate and encourage new (and yet‑to‑be developed) technologies, and open the door to more innovative offers down the road.

Businesses can freely set the price, quality, and quantity of their products and services

Policies that require a business to charge the same price, or offer the same quality or quantity of products and services as its competitors, reduce the incentive for that business to find new ways to lower costs, increase productivity or improve quality. This can lead to consumers paying too much for lesser quality products and services.

For example, policy that aims to level the playing field between businesses and consumers by setting price is not always in the best interests of consumers. The "right" price is difficult to determine and constantly changing. By setting the price too high, this can have the effect of pushing value-focused businesses out of the market, and result in some customers purchasing fewer goods or services than they would have otherwise. Conversely, if the price is set too low, businesses can have less incentive to innovate, and consumers may have trouble finding the goods or services they need.

Similarly, minimum quality standards can be necessary in certain circumstances for health and safety reasons. In such instances, if standards are set artificially high or in a way that unnecessarily disadvantages a particular business or technology, they can diminish competitive intensity in the market and reduce consumer choice.

Restrictions in context: modernizing regulation in the Canadian taxi industry

Governments regulate taxi services to ensure that they are safe, predictable, and straightforward for consumers. Historically, to fulfill this public interest role, policymakers created rules governing taxi prices and limiting the number of taxis in an area.

In November 2015, the Bureau called on policymakers to modernize taxi industry regulations, with a focus on enhancing competition, increasing choice, and lowering prices.Footnote 18 When policies place limits on the number of taxis operating in a city, consumers of taxi services have fewer service providers from which to choose. This can lead to higher prices and reduced quality of service, including long waiting times.

By allowing market forces, rather than regulation, to determine fares and quality levels, consumers have benefitted from a ride sharing revolution in many Canadian jurisdictions, receiving lower prices, higher quality services, and shorter waiting times.

Businesses have a strong incentive to compete

Policies that limit the potential gains a business may realize by competing vigorously can reduce the incentive for businesses to compete. These include requirements for businesses to publish information about prices, outputs or sales, self-regulatory arrangements, and profit or market share caps.

For example, self-regulated industries, where market participants are responsible for governing the conduct of the industry, may be prone to adopting rulesFootnote 19 to protect incumbent businesses, such as restricting pricing, marketing, or market entry.

Incentives in context: bringing competition into focus through online eyewear sales

In Canada, self-regulating professional organizations often set the rules for how professionals conduct their business. These rules can be based on traditional business models, which can diminish the incentive for professionals to compete by limiting the entry of new and innovative business models.

With the recent surge in online eyewear sales, some self-regulating bodies cautioned against online eyewear sales, suggesting it could compromise patient care. In June 2018, the Bureau called for a greater focus on competition when implementing and reviewing policies that govern the industry.Footnote 20

Policymakers should consider whether rules are strictly necessary, and whether existing rules could adjust to accommodate new business models. For example, the Bureau asked whether measures could facilitate online sales, while at the same time maintaining patient health and safety.

Consumers can easily switch between competitive alternatives

When consumers can easily switch to a new business, companies will offer better services at lower prices in order to win or keep customers. This is the essence of competition.

Impediments to switching, such as complicated, time-consuming and expensive switching processes, are called switching costs. Switching costs make it more difficult for new businesses to gain traction in a market because customers are more likely to stay with their current service provider even if a better offer exists. Businesses also have less incentive to discount their prices and innovate when consumers find it difficult to switch.

Switching costs can be borne out of lengthy contract terms, high cancellation fees and limitations on data portability. For example, if a customer faces a high fee to cancel a service, they may be less inclined to switch in order to avoid the upfront cost, even if they could save more in the longer term by switching to a provider that offers lower fees or a better value proposition. Similarly, a customer is less likely to switch a service if they are unable to take their information, such as transaction history, with them when they switch.

Government policies can address impediments to switching that arise from marketplace realities, and lower these barriers to competition.

Switching costs: simplifying internet service products

Changing your internet provider can be a challenge for some consumers. In order to switch from one provider to another, consumers may incur monetary costs, such as cancellation fees, and non-monetary costs, such as the time and mental burden involved with searching for a new provider and comparing complex service dimensions, like download speeds, download caps, and network technologies.

In such a complex setting, consumers do not always have the information necessary to make informed purchase decisions. This can further exacerbate the time and mental costs associated with switching services.

In December 2018, the Bureau recommended that the Canadian Radio-television and Telecommunications Commission mandate a clear, simple, standardized quote to facilitate comparison of offers from competing service providers.Footnote 21 When consumers find it easier to switch, competition among service providers is maximized.

Step 3: Identify alternatives to address policy goals, if necessary

If the proposed policy will affect any of the indicators of a competitive marketplace, then a policymaker should proceed to this step of the competition assessment. In this third step, the policymaker should ask whether other policy approaches would be less intrusive to competition and market forces, and assess whether those alternative approaches will also satisfy their policy goals. If so, then those alternative approaches should be preferred.

In conducting this assessment, policymakers should base decisions, to the greatest extent possible, on objective empirical evidence. While industry experience and consumer perceptions can be necessary to frame the relevant issues, only empirical evidence can measure what is occurring on a broad scale across an industry. A key role for policymakers, therefore, should be the collection and preservation of marketplace data in order to ensure that the best possible evidence is available to assess policies.

Policymakers should focus on the features of the policy identified in Step 2 as having the potential to restrict competition and assess whether those restrictions are:

  1. necessary,
  2. narrowly cast, and
  3. proportionate.

Restrictions on competition:

Are the restrictions on competition necessary to achieve a legitimate policy objective?

Restrictions on competition are often unintentional and can be readily resolved without compromising the underlying policy goal. This can be the case, for example, when aspects of a policy become outdated, redundant, or inadvertently misaligned across jurisdictions, leading to unintended constraints on businesses. Policy reviews can identify such instances, and reforms will generally serve to promote competition while also improving regulatory coherence.

More complicated situations arise when the restriction on competition is not merely incidental, but is an essential element of the policy design (e.g. a policy that regulates entry or prices). In these cases, policymakers should think carefully about the underlying policy rationale for the restriction and whether it is aimed at addressing a genuine market failure. Sometimes, on closer examination of the evidence, the policymaker will determine that the restriction is not necessary (or no longer necessary) and that reliance on competitive market forces is appropriate.

These situations present a relatively simple path forward for the policymaker, as they do not require an assessment of feasible alternatives or a weighing of the costs and benefits of the restriction.

Achieving legitimate policy objectives: Canadian propane prices

During the winter of 2013‑2014, propane prices in some areas of Canada skyrocketed. The Ministers of Natural Resources and Industry asked the Bureau and the National Energy Board to investigate the causes of the exceptionally high prices. Some industry observers called for governments to regulate propane pricing to protect consumers from high heating costs.

The Bureau opposed such measures in its joint report with the National Energy Board,Footnote 22 noting that short term price spikes can incentivize producers to bring additional supplies to market. If regulators had imposed price controls, then this important market mechanism could not have functioned. Ultimately, prices returned down to normal levels.

Are there feasible alternatives that would pose less harm to competition?

In some circumstances, it may not be possible to achieve the policy goal without restricting competition at least to some degree. In those cases, however, the policymaker should look for feasible alternatives, and try to cast any restrictions as narrowly as possible to preserve the greatest amount of market‑based competition. Policies that are broader than what is necessary to achieve policy objectives increase the risk of choking off the competitive spirit, resulting in higher prices, less choice, and decreased levels of innovation. Targeted policies can fulfill objectives while at the same time providing maximum scope for market forces.

Identification of feasible alternatives will be highly specific to the policy under consideration, however, inspiration can often be found by looking at the range of approaches taken in other comparable jurisdictions. In addition to the examples cited throughout this Toolkit, a table of illustrative policies and ways of mitigating their negative effects on competition is provided on the following page.

Minimizing harm: easing foreign ownership restrictions in the Canadian airline industry

In November 2016, following a statutory review of the Canada Transportation Act, Transport Canada announced that it would ease foreign ownership rules in the airline industry in an effort to increase competition from ultra–low-cost carriers (ULCCs).Footnote 23 The Transportation Modernization Act, which came into force in June 2018, increased international ownership limits on Canadian airlines from 25 to 49 per cent.Footnote 24

In its submission to the Canada Transportation Act Review Panel, the Bureau recommended that increased foreign ownership of airlines be permitted to allow new and existing airline carriers increased access to foreign capital, and to promote greater choice, lower prices, and increased levels of service for Canadian travelers.Footnote 25

Following the increase in international ownership limits, a number of ULCCs entered the Canadian market,Footnote 26 offering Canadians a greater choice of airline services.

Illustrative policies and ways of mitigating their negative effects on competition
Features of a competitive market Policies that can impede competition Strategies to mitigate negative effects
Businesses can easily enter and expand Granting exclusive rights to a business to produce a good or provide a service Use a competitive bidding process to allocate exclusivity rights and limit the duration of the contract
Limits on the number of licences to sell a product or provide a service Ensure limits serve legitimate policy goals, and do not simply serve to protect the interests of certain businesses, and have licences awarded based on a competitive and transparent process
Requirements that raise the cost of entry, such as physical infrastructure requirements Minimize and target policies that can increase the cost of entry, such as providing exemptions for small-scale producers
Businesses can freely set the price, quality and quantity of their products and services Setting a maximum price at which a product or service can be sold Consider policies to increase market entry to drive down market prices, in place of fixed prices or price ceilings
Establishing minimum quality or production standards Favor disclosure requirements in place of strict standard setting
Businesses have a strong incentive to compete Establishing a self-regulated body Implement an independent oversight function to ensure rules serve legitimate policy goals, and do not simply serve to protect the interests of incumbent members
Requirements to make business information publically available Publish aggregated information in place of disaggregated information and only make public what is necessary to achieve policy objectives
Customers can easily switch between competitive alternatives Cancellation fees for ending a regulated service Ensure that fees or cancellation processes have a legitimate business justification (e.g. to recover costs) and are based on empirical evidence

Do the benefits of the policy outweigh the harm to competition?

Lastly, there is the question of proportionality. A policy is unlikely to be problematic where the above criteria have been applied, and where the harm to competition has been eliminated or reduced to the point that it is negligible in comparison to the anticipated benefits of the policy. In such cases, a detailed cost-benefit analysis or balancing of policy goals is not necessary.

In less clear-cut cases, however, it may be necessary to take further steps to consider whether the benefits of the policy outweigh the harm to competition, notwithstanding steps taken to minimize that harm. Policymakers should look to the available empirical evidence to facilitate this analysis, and may ultimately determine that "no policy" is preferable, or may look to other alternatives that partially achieve policy goals while posing substantially less harm to competition than the previous alternatives considered. These more complex scenarios are beyond the scope of this Toolkit but illustrate the range of considerations that a policymaker could face when balancing competition and policy.

Balancing benefits: easing restrictions in the Canadian taxi industry

In 2015 and 2016, the City of Ottawa reviewed its existing Taxi regulations.Footnote 27 Prior to this review, the number of taxis on Ottawa's streets was strictly limited through a quota system. During the review, the City of Ottawa indicated that its three guiding policy objectives were public safety, accessibility, and consumer protection.

Inspired by, amongst other things, the Bureau's Taxi Regulation White Paper,Footnote 28 the City opened its Taxi regulations to allow newer forms of competition. In doing so, the City recognized that limits on the number of taxis are not strictly necessary when other regulations can address the City's policy objectives.

Step 4: Implement the best alternative

Once a policymaker is satisfied that it has identified a policy that achieves the policy goal in the most competition-friendly manner, based on the best available evidence, then it is ready to move that policy through normal course implementation.

Step 5: Conduct an ex-post assessment

Following implementation of any policy, policymakers should monitor its marketplace effects. Even the most well-crafted and widely-consulted policies can sometimes have unintended consequences when they are introduced in the marketplace.

It is important that policies keep up with the rapid pace of economic development and technological change; otherwise, there is a risk that timeworn policies can negatively affect new ways of doing business. Policymakers can limit this risk by committing to review existing policies on a regular basis.

Periodic reviews: sunset clauses over Canadian railway regulation

Following delays in the shipment of grain by rail during the winter of 2014, the Government of Canada issued an Order in Council directing Canadian railways to move a specified amount of grain per week. This order included a "sunset clause", whereby the order would expire on a set date unless the Government decided to take specific further action.

In its submission to the Canada Transportation Act Review Panel, the Bureau supported such sunset clauses as an effective way to ensure that policymakers actively review policies on an ongoing basis.Footnote 29

Conclusion

Incorporating competition assessment into policy review will require the dedication and collective effort of both the Bureau and Canada's policymakers.

The Bureau, as Canada's competition expert, has the responsibility to promote the benefits of competition across the Canadian economy. Policymakers, as subject matter experts, can help achieve those goals by incorporating competition analysis into policy assessment.

Competition analysis can be complex and the Bureau can help policymakers with this difficult task. If you would like to discuss the Toolkit or have questions about particular policy proposals, please contact our Competition Promotion Unit.

"Competition and regulation do not have to work at cross-purposes, but this requires intentional and proactive consideration of the impact any regulation might have on competition. To support this shift in culture, the Bureau is ready to do all that it can to assist government agencies at all levels in creating rules that foster competition."

Matthew Boswell
Commissioner of Competition
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