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Competition Bureau as a SNL Skit

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Competition Bureau as a SNL Skit

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I have argued in the past that competition policy makes little sense and has done little to promote competition. The attempt by the Competition Bureau in Canada to block the joint venture (JV) among Air Canada, United and Continental reinforces my call for abolishing this group and throwing away most of the Competition Act.

As reported in the press today, Melanie Aitken, who heads the Bureau, opposes the JV because it might create a monopoly in a number of transborder (Canada-US) routes. Her claim highlights the major problem with competition policy and its enforcement: lawyers with no understanding of competition relying on economists, who might be well versed in theory but do not understand real competition either.

The Competition Bureau pointed to a number of transborder routes where the JV might control 65% or more of the market, including several where the JV might control the entire market. So what?

The routes where the JV might have a 100% market share consist of the hub airports of Air Canada (Toronto, Vancouver and Montreal) and United-Continental (San Francisco, Houston, Denver, Washington-Dulles, Newark and Cleveland). Obviously, the Bureau is only considering non-stop routes and traffic because there are always alternatives involving stops and/or some driving.

Does the Competition Bureau actually believe that the Star Alliance members would compete aggressively against each other on these routes if the JV is blocked? This will never happen.

Does the Bureau actually believe that by blocking the JV someone else might enter into these markets? If so, the Bureau is more naive than I thought. Why would any other airline want to fly between Toronto and Cleveland? Virgin America did not last long in the California-Toronto markets. And Westjet has not expanded into the Calgary-Houston market.

If the Competition Bureau checks, it will find that Emirates controls 100% of the Toronto-Dubai market; Delta probably comes close to 100% of the Toronto-Detroit market; and Delta and American likely have market shares well in excess of 70% in transborder markets connecting to their hubs in Salt Lake City and Dallas respectively. Is the Bureau prepared to take actions against these airlines?

The Competition Bureau seems to ignore leakage – Canadians, especially around Vancouver, Toronto and Montreal, who drive to nearby US cities to take advantage of lower fares to many US destinations. Leakage has been attributed to the taxes and fees added to the base fares at Canadian airports, not to the existence of airline alliances and the dominance of Star Alliance in many transborder markets. If the Bureau is truly interested in lower fares, it should be petitioning the federal government to change its rent, tax and security policies in the airline industry.

There is a good reason why low-cost carriers in the US have not entered directly into the transborder markets, and it relates to the same policies of the Canadian Government that have contributed to increasing leakage over time.

The Bureau also listed several routes where the JV might have a market share between 34% and 70%. How much competition is needed in any market?

Thirty years ago, the Competition Bureau bought into contestability theory. The theory claimed that the threat of competition sufficed to limit the pricing power of a monopoly. The Bureau relied on this theory to support deregulation of the airline industry in Canada. The theory was later discredited, and the Bureau’s expectation of rampant competition across Canada never materialized. But then again, anyone who really understood competition knew this at that time. Unfortunately, the Bureau was not among them. And unfortunately the Bureau cannot answer the question today about how much competition is needed, and more importantly, whether it might ever develop.

The Competition Bureau pointed out that the JV might control 62% of the Toronto-New York market. Why didn’t the Bureau intervene to block access to the Toronto City Centre Airport for Continental Airlines? Continental has decided not to use their slots at this time, slots that would be used solely in the Toronto-New York (Newark) market. Why isn’t the Bureau helping Porter Airlines get US pre-clearance at this airport so that Porter might be able to enter the Washington-Reagan and New York-LaGuardia markets?

Finally, what might be the potential costs to consumers if the JV were allowed? I suspect that in the worst-case scenario for consumers the additional costs, ignoring the offsetting efficiency gains for the JV, likely would be much less than the impacts of an additional $5 per barrel in the price of oil or less than the impacts of the federal government’s policies.

The opinions expressed in this bog 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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