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The myth of competition policy

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The myth of competition policy

Most of competition policy and the supporting law should be repealed.

Section 1.1 of the Competition Act in Canada sets out the objectives: “Maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy; expand opportunities for Canadian participation in world markets; ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy; and provide consumers with competitive prices and product choices.”

The Competition Act cannot encourage competition! Competition is encouraged only by the desire to succeed through the creation of a competitive advantage. Nor can the Act “promote the efficiency and adaptability of the Canadian economy”. Again, only the actions of senior management can do this, and these actions may succeed only if senior management is properly motivated and smart enough to recognize the advantages of being lean and hungry.

Joseph Schumpeter long ago recognized the importance of the pursuit of monopoly power as the primary driver for risk taking and innovation. Unfortunately, his great insights did not permeate the economics mainstream, and they did not do so for they would have revealed the major flaws in the evolving general equilibrium models touted by economists. The latter underlie competition policy, despite their inability to explain real competition and competitive behavior.

Schumpeter argued that there was no need to fear the creation of monopolies, unless they were the creation of government. Monopolies created by the successful execution of competitive strategies produce the long-term productivity gains for the economy. Moreover, monopolies do not last forever.

GM was once the dominant automobile company in North America. It has been bailed out, and its survival is not a sure bet. TWA and Pan Am once ruled the international airline markets. Both have long ago disappeared. Nortel was a market leader in creating and manufacturing telecom hardware and software. The company is now being dismantled.

Eaton’s was once the leading department store in Canada. It too failed and disappeared. Its demise was not the result of the enforcement of competition policy. Similarly, in the U.S., Woolworth’s, Montgomery Wards, Kresge’s and even Sears Roebuck have all been overtaken by Wal-Mart, and this dramatic change in the retail sector landscape had nothing to do with the anti-trust laws in the United States.

And the examples never end. It was only a few years ago that the competition authorities in the EU and the U.S. were stopping mergers between the leading companies in the record industry. The Internet has made their strategies obsolete and their market power non-existent. Did the U.S. Department of Justice case against IBM lead to the creation of Microsoft, Cisco, Sun, Oracle, Dell, Acer, Google and others? Not at all.

The lesson: competition policy is not a positive force for the process of creative destruction, a process that produces the large, dynamic productivity gains for the economy. Competition policy cannot and should not prevent companies from becoming dominant. The dominance is usually fleeting.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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