On October 19, 2023, Canada’s Competition Bureau (Bureau) released a new study of competitive intensity in Canada between 2000 and 2020 (see: Competition Bureau report finds Canada’s competitive intensity in decline).
In announcing its new study (Competition in Canada from 2000 to 2020: An Economy at a Crossroads) (Competitive Intensity Report), the Bureau said:
“Our findings further highlight the need to modernize Canada’s competition laws and adopt a whole-of-government approach to promote competition. Without the adoption of pro-competitive policies, Canada risks continuing down the road of declining competitive intensity. Taking action to increase competition will drive lower prices and make life more affordable for Canadians.”
The Bureau’s new study comes at a time of increased scrutiny of competition in key Canadian consumer related sectors, particularly grocery, several years of debate and introduction of amendments to update Canada’s Competition Act, anticipated further extensive amendments to the Competition Act (including recent proposals by the Liberal government, NDP opposition and the Bureau itself) and ongoing political inflation and cost of living related debates.
According to the Bureau, its new study is the first of its kind in Canada to provide a comprehensive analysis of indicators of competition across the entire economy, including concentration (which indicates whether a few companies dominate an industry), industry dynamism (which indicates whether new companies are challenging existing ones) and profits and markups (which indicate whether competition is pushing companies to keep their prices low).
Key Findings
In general, the Bureau found that Canada’s competitive intensity had fallen over the past twenty years, which was reflected across all the indicators measured.
Some of the Bureau’s more specific findings include that:
Concentration increased in the most concentrated industries. Concentration for the top 10% and 25% most concentrated industries rose overall between 2005 and 2018. More specifically, the Herfindahl-Hirschman Index (HHI) in the top 10% most concentrated industries rose by 8.6% (to 3,060 in 2018) and in the top 25% most concentrated industries by 10.7% (to 2,149 in 2018). The number of industries with an HHI greater than 2,500 (highly concentrated) also rose from 19 in 2005 to 27 in 2018.
Rank stability has gone up across industries. According to the Bureau’s report, this means the largest firms in industries face less of a challenge from smaller firms. Less than 1% of industries saw their rank stability fall (accounting for less than 0.5% of all industry revenues). The overall rise in rank stability across the economy may mean that competitive intensity has gone down and larger firms are more entrenched in their positions.
Entry and exit rates have gone down across industries, while the firm survival rate has risen. According to the Bureau, this indicates that industries are becoming less dynamic and existing firms face less pressure from potential new ones. The Bureau found that average entry and exit rates had declined across the economy between 2001 and 2020 (entry rates down by 24% and exit rates down by 8%). Survival rates rose across all industry groups from an average of 68.4% in 2005 to 70.4% in 2020. According to the Bureau the combination of survival rates with falling entry and exit rates means that industries have become less dynamic.
Economies of scale declines overall (though entry rates have not gone up with them). According to the Bureau, this means that larger firms are becoming less efficient compared to smaller ones.
Markups and profits have both risen overall. There was an overall increase of 6.7% in the average markup across all industries between 2002 and 2018 and an increase of 12.5% in industries with the highest estimated markups. Profits, measured in the report by return on sales (ROS), also increased for most industries and on average overall. The top 10% of industries with the highest ROS had an increase in ROS from 29.2% in 2000 to 37.7% in 2020 (an increase of 8.5%).
Implications
The Bureau’s new Competitive Intensity Report, which broadly quantifies the recent level of competitiveness in Canada generally, will likely be used by the Bureau to further advocate for Competition Act reforms. It would also seem likely that the Report will be used politically in the current cost of living debate to argue for legislative and policy solutions to increase competition in key sectors in Canada.
It remains to be seen, however, whether currently proposed and anticipated Competition Act amendments, as well as any other legislatively driven structural market changes, will significantly increase competition in Canada’s traditionally highly concentrated consumer sectors.
For more information about recent Competition Act amendments and Bureau recommendations for further competition law reform, see: Criminal Competition Act Amendments Come Into Force June 23rd – Increased Fines and New Offences, Canadian Competition Commissioner Argues Key Canadian Markets Highly Concentrated and Again Advocates for Stage II Competition Act Amendments, Canadian Competition Bureau’s 2023-2024 Annual Plan: Increased Litigation, Competition Act Amendments and Focus on Digital Economy and Competition Bureau Publishes Sweeping Recommendations for Canadian Competition Law Reform.
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