Like regulatory agencies everywhere, Canada’s Competition Bureau (the “Bureau”) is grappling with the fast-changing digital economy and its implications for competition and innovation. The development of new technologies, their rapid uptake by business, and the deployment of new data-driven business models has left regulators – chiefly privacy and competition regulators – examining whether these new types of business models now pose regulatory threats not previously appreciated.
On May 22, 2019 the federal government unveiled a Digital Charter with 10 principles by which the government proposes Canada should adapt to an economy characterized by artificial intelligence and data-driven products and services. The Charter includes a letter from Minister of Innovation, Science and Economic Development Navdeep Bains to Commissioner of Competition Matthew Boswell.
In Bains’ letter, he asks the Bureau to work with his department in considering “the impact of digital transformation on competition; the emerging issues for competition in data accumulation, transparency and control; the effectiveness of current competition policy tools and marketplace frameworks and the effectiveness of current investigative and judicial processes.”
Competition challenges in the digital economy
Among the Bureau’s challenges is the perception – justified or not – that digital markets are not only more prone to monopolization than their brick-and-mortar counterparts but their digital nature may also be more likely to lead to anti-competitive outcomes. To help it better evaluate the situation, the Bureau has issued a “call-out” to market participants asking them to share “information on potentially anti-competitive conduct in the digital economy.” The Bureau states that responses will inform its surveillance and analysis of the digital marketplace, inform potential guidance, and “support the commencement or further development of an investigation into alleged anti-competitive conduct.”
Digital markets may tend towards greater monopolization
The call-out advances two theories as to why digital markets may tend towards greater monopolization:
- Digital markets may ‘tip’ to a dominant firm: characteristics of certain digital markets may favour the emergence of a single winner or a small group of winners.
- Anti-competitive conduct rather than competition on the merits: leading firms may not have achieved success by outperforming their competitors, but rather by executing anti-competitive strategies that target existing or potential rivals.
The notion that digital markets are inherently more monopoly-prone is said to be most likely when firms benefit from the following features:
- Strong network effects. These can be direct (i.e., the network’s benefits increase as the number of users increase, such as with a social media platform) or indirect (e.g., the network benefits by bringing different types of users, such as buyers and sellers, together in an online marketplace). The result is a “chicken-and-egg” dilemma for new entrants, who need users to demonstrate value but can only demonstrate value if they have large numbers of users.
- Economies of scale and scope. These economies arise as digital ecosystems are often costly to design, implement and provide reliably. Costs may be prohibitive for new entrants hoping to challenge an incumbent, which can spread its costs over a large number of users. Such economies may exist both in the existing market (as with an established social media platform) and in new markets (for example, an established platform expands into a new line of business leveraging its existing resources which gives it a significant advantage over smaller firms).
- Access to large volumes of data. It is no secret that data is a critical input to many products and services in the digital economy. In the case of online services provided at no charge (often the case with social media or search engines), the data gathered from users enables firms to enhance the quality of existing products, thereby attracting more users. Parallel to this feedback loop is another similar effect: firms’ ability to to improve the quality of targeted advertising means that they can charge advertisers more for advertisements. Both strengthen the incumbent’s position.
In the Bureau’s view, where the above factors lead towards a market dominated by a monopolist or few players, the Bureau needs to be extra vigilant to identify and pursue anti-competitive conduct undertaken to maintain a firm’s existing market dominance or to capture adjacent ones.
Examples of anti-competitive strategies
The Bureau gives the following examples of anti-competitive strategies that a digital firm may adopt:
- Refusal to deal. A firm may sell its data only to others that do not compete with its core business.
- Self-preferencing. A firm may steer consumers towards its own product, such as a search engine whose results prioritize its own offerings rather than a competitor’s..
- Margin squeezing. A firm may charge its competitors prices for inputs that make it impossible for the competitors to supply products profitably, such as an app store that sells its apps for $5 while charging competitors a $5 commission per app sold.
- Most favoured nation requirements. A firm may prohibit its business partners from giving competitors more favourable terms, such as a hotel search engine that prevents its partners from offering better rates on competing websites.
- Creeping acquisitions. A firm may buy out both existing and potential rivals to prevent the emergence of a serious competitive threat.
Determining illegal conduct
Assuming that the dynamics described above exist, while they may make digital marketplaces fundamentally different from traditional ones, they do not necessarily constitute illegal conduct under the Competition Act. Indeed, the Bureau recognizes that such conduct may actually be pro-competitive in both the short and long runs, resulting in greater product selection and innovation, lower prices, etc.
Consistent with the Bureau’s approach to abuse of dominance cases under section 79 of the Competition Act as outlined in its updated guidelines published last March, the call-out indicates that in determining whether the impugned conduct is likely to harm competition, the Bureau will consider in particular the following factors:
- Whether the firm engaging in the conduct appears to have durable market power, in the sense that it has, and is likely to maintain, significant control over a market.
- Whether there is compelling evidence that the firm was actually engaging in the conduct for a pro-competitive or efficiency enhancing purpose, and whether these benefits were realized.
- Whether prohibiting the conduct at issue is likely to dampen incentives for firms to invest in innovation.
Deadline for submissions
The call-out invites market participants to provide their written submissions no later than November 30, 2019, either online through a form specifically designed for this process or the Bureau’s general complaint form, or in-person at meetings that the Bureau expects to schedule this fall in various locations in Canada. The Bureau is asking market participants to focus on the following subjects:
- why certain digital markets have become highly concentrated, which will assist the Bureau in differentiating anti-competitive from pro-competitive or neutral conduct.
- past or ongoing conduct in the digital economy raising competition concerns, including but not limited to the conduct noted above.
- The impact (actual or potential) of the described conduct on the ability of rivals to challenge an incumbent firm.
The Bureau has stated that it will “treat all submissions as confidential”.
Dentons’ Analysis
The Competition Bureau has trained its sights on the digital economy as have other competition authorities in major jurisdictions such as the US, the UK and the European Union. While the Bureau has indicated that it does not expect to need a radical overhaul of the Competition Act and its enforcement powers, it is actively monitoring the marketplace to identify anti-competitive activities that may have a detrimental impact on competition and innovation.
The Bureau has recently taken steps to enhance its ability to detect conduct that may harm competition; this year it established the Merger Intelligence and Notification Unit to identify problematic mergers that are not notifiable, and the Criminal Intelligence Unit to support the investigation of cartel-type conduct. It has also created the new position of Chief Digital Enforcement Officer with a mandate “to monitor the digital landscape, identify and evaluate new investigative techniques, and boost its digital intelligence gathering capabilities”. With this call-out, the Bureau is taking a step further by both educating market participants on the types of conduct it sees as problematic and proactively enlisting such participants to bring forward examples of behaviour that may be impeding competition in digital markets.
While no one would claim that digital marketplaces are identical to their offline counterparts, it is not necessarily clear that they naturally tend towards greater monopolization in an enduring fashion or that innovation is impaired. Where not so long ago the names AOL, Yahoo, Netscape, Pets.com, Myspace, Napster and AltaVista evoked commercial might, today they evoke nostalgia. Whether the shift from those companies to their successors in the digital world was a one-time transition possible only in the Internet’s formative years, or a process that will repeat itself regularly, only time will tell.
From a competition law perspective, there may also be challenges in bringing cases involving digital markets. For example, whether a firm is “dominant” depends on how the relevant market is defined, that is, which firms compete with each other and in what way. As the Bureau concedes in its Abuse of Dominance Enforcement Guidelines, this analysis may be more challenging where products are offered at a zero price (such as search engines) and qualitative indicators of substitutability will need to be considered.
It is worth noting that the Bureau recently published a report on its Data Forum held in May 2019. Among other things, it posed (without resolving) the question of how much consideration the Bureau should give to privacy-related issues. While Canada already has a separate regulatory infrastructure dedicated to privacy issues, including the Office of the Privacy Commissioner of Canada, privacy may be a basis on which firms compete in the market; as a result, the Bureau and other competition authorities will monitor mergers that may lead to less strict privacy practices, and privacy issues can arise in abuse of dominance cases as well. In addition, the report notes that an ability for a consumer to switch service providers may depend upon data portability: the ability to easily and freely transfer personal information from one firm to another. It is quite possible that in addition to raising purely competition concerns, the call out to market participants may also elicit comments on the intersection of competition and privacy law as well as the extent to which data portability may serve as a barrier to competition in various sectors, including banking.
Originally published on the Dentons Data blog.
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