Question

What are examples of public monopolists in Canada? Can you think of technological reasons that these markets are monopolistic? Do you think that these public sector monopolies go very far in solving the efficiency problems that would be faced in that market if it were a private monopoly?

Answer 1

public monopolists in Canada

IT is extremely difficult to generalize about the degree of competition in Canadian industry, first, because of the lack of information, and second, because of the vagueness of the concept. So far as information is concerned, the existence of our Combines Investigation machinery has had a two-fold effect ; it has made available very detailed studies of the competitive, or non-competitive, structure of certain industries which have been subject to investigation ; but it has also inhibited, to a considerable extent, the study of market structure by private research workers by increasing the need for secrecy on the part of industry. Lord Keynes, at the end of his Treatise on Money, said of the English banks that they 'have, until recently, looked on the economic inquirer as though he were the policeman in the pantomime who warns the fellow under arrest that "everything he says will be taken down, altered, and used in evidence against him" '. In Canada, Canadian industry has a similar distrust of economists combined with a greater need for secrecy. I think that there is some evidence that this distrust is declining, and it would be wrong to over-emphasize this point. One must also recognize that economics is a very young science in Canada, only emerging from 'colonial' status about twenty-five years ago, and resources, human and pecuniary, available for research have been very limited. Studies of particular industries are very few indeed.

So far as the concept of competition is concerned, there is need to develop more agreement ; clearly there is little 'atomistic competition' of the sort assumed for the theory of pure competition ; but clearly too there is a high degree of competition in the sense in which business men use that word. What we are concerned with is whether that 'competition' is an effective social control of the behaviour of individual firms. I am inclined to believe that there is much more competition and that it is a much more effective control than is generally supposed. (After writing this, I find that a similar estimate is made by Mr. F. A. McGregor in his paper for this Conference, and none is better qualified to make such an estimate than he.) But most of our information is about industries rather than products. We know that Courtauld's (Canada) Ltd. is the sole producer of rayon (viscose) yarns, while cellulose acetate yarns are produced only by Canadian Celanese ; 1 but we do not know much about the extent to which these two products compete with each other and with other fabrics. On the other hand, we find an industry with a considerable number of firms but some of these may have the monopoly of a particular product, or of a particular locality. Specialization of the firms in the cotton industry, for instance, appears to make this a more monopolistic industry than would appear from the number of firms ; and the bread-baking industry, with several thousand firms across Canada, appears to contain localities within which competition is very restricted. Finally, even where there is an agreement in restraint of competition, there may be strong competitive forces at work preventing that agreement from being very restrictive. Indeed, in studying the competitive situation in the textile industry, through the medium of the evidence presented to the Royal Commission on Textiles (1938), I was impressed with the fact that the more formal the association, the more competitive the situation ; the very formality was related to the difficulty of controlling the competitive forces. The contrast was particularly marked between the formal but ineffective association in the fullfashioned hosiery industry, and the effective maintenance of prices by tacit agreement in some other branches of the textile industry.

Faced with the impossibility of describing the current situation in general, I propose to comment briefly on the sources of information, thus providing some pieces for the jig-saw puzzle. This raises a problem as to how far back one should go. Perhaps it would be salutary to go back to the large-scale monopoly inquiry by a Select Committee of the House of Commons in 1888. It gives one a useful reminder that our problems are not so new as we sometimes think.

Technological reasons monopolistic

Innovation is often viewed as new, novel technology—unprecedented discoveries that forever alter the way we conduct business or aspects of daily living. Schumpeter’s “gale of creative destruction” assumes that markets will naturally mutate and evolve as disruptors replace old incumbents. But one of the most pivotal mechanisms for fertilizing the ecosystem of innovation, less often discussed, is robust market competition.

Healthy competition among businesses fosters innovation and the ability for new entrants to compete. Competition is an indispensable element of capitalism. Yet, competition is withering away at a rapid pace, replaced by increasingly larger firms that dominate their respective industries.

Industry concentration has been particularly pervasive in the United States over the last 40 years; however, Canada is no stranger to the role of oligopolies. The most concentrated industries are ones that Canadians will be well familiar with: telecoms, airlines, oil, and banking.

The wireless telecom industry in Canada is heavily concentrated, with the big three (Rogers, Bell, and Telus AKA “Robelus”) collectively capturing an estimated 88.7 percent of the market. ABInBev and Molson Coors maintain a duopoly and control 63 percent of the beer Canadians drink (including Becks, Budwiser, Corona, Miller and seemingly smaller brands such as Granville Island Brewing). Canada’s airline market is a duopoly with WestJet and Air Canada controlling nearly 85 percent of the market between them.

Banking is controlled by the Big Five (TD Bank, RBC, Bank of Nova Scotia, Bank of Montreal, CIBC) and 4 of those 5 have acquired independent investment banks and asset management firms in recent years to swell their assets to enormous proportions, even relative to US banks. Apple and Samsung account for almost 81 percent of all Canadian smartphone sales, and Amazon continues to make headway with ecommerce sales in North America. It captured 44 percent of all US e-commerce in 2017 and close to 22 percent in Canada in 2016. Canadians pay some of the highest rates globally for international travel, cell phone packages, and banking services.

In December 2018, the Canadian House of Commons released a report entitled “Democracy Under Threat: Risks and Solutions in the Era of Disinformation and Data Monopoly.” The report detailed a number of proposals in response to rising concerns about Big Tech and its ownership of citizen data, such as: implementing increased funding for the Office of the Privacy Commissioner, increased transparency for online political advertisements, and algorithm auditing, to name a few. Among these recommendations, the report also called on the Government of Canada to: “study the potential economic harms caused by data-opolies and determine whether the Competition Act should be modernized.” Data-opolies are a particularly threatening form of monopoly, because they not only can affect what consumers pay for services, but also potentially compromise privacy, autonomy and the democratic process itself (as seen with the 2016 US election tampering).

The title “Democracy Under Threat” may seem alarmist, but free markets are as important to economic determinacy as voter agency is to political democracy. At a time where Google has 92 percent market share in internet search and Facebook controls over 70 percent of social networking, the time is well past due to be asking questions about the kind of markets we are creating and sustaining.

Lack of competition stifles innovation, and Canada has been plagued by declining entrepreneurship rates and weak business dynamism since the 1980s. Canadian firms also spend less on R&D than many of their counterparts among developed countries. This has been attributed to low risk-appetite within Canadian firms, a smaller national market-size, and high corporate taxes. But perhaps a more compelling reason is, that when large incumbents lack competition, there is less need to innovate or self-disrupt.

When discussing economic inclusion, innovation, and fostering Canadian entrepreneurs, serious attention should be paid to the antitrust actions of the Competition Bureau. The Bureau is an independent agency tasked with the administration and enforcement of the Competition Act and the review of corporate mergers to deter anti-competitive behaviour and guard consumer interests. To compete internationally, Canadian regulators have often protected the larger players to the detriment of entrepreneurs.

Venture capitalists in Silicon Valley refuse to fund startup businesses that will compete with today’s dominant tech players (Alphabet (Google), Amazon, Facebook, Apple, and Microsoft). There is an effective ‘kill zone’ around these giants, and the predominant attitude is that challenging their ascendancy means inevitable defeat. Subsidized funding for startups in Canada’s ‘kill zones’ of telecoms and banking should be considered. Relaxed regulatory burdens on smaller firms could also help, as regulation often strengthens dominant firms that have the resources to comply when small and medium-sized businesses often struggle to do so.

Competition is an integral part of sustaining a thriving ecosystem of innovation in Canada. It is time to disrupt the oligopolies and restore competition to Canadian markets.

Inefficiency in a Monopoly

In a monopoly, the firm will set a specific price for a good that is available to all consumers. The quantity of the good will be less and the price will be higher (this is what makes the good a commodity). The monopoly pricing creates a deadweight loss because the firm forgoes transactions with the consumers. The deadweight loss is the potential gains that did not go to the producer or the consumer. As a result of the deadweight loss, the combined surplus (wealth) of the monopoly and the consumers is less than that obtained by consumers in a competitive market. A monopoly is less efficient in total gains from trade than a competitive market.

Monopolies can become inefficient and less innovative over time because they do not have to compete with other producers in a marketplace. For private monopolies, complacency can create room for potential competitors to overcome entry barriers and enter the market. Also, long term substitutes in other markets can take control when a monopoly becomes inefficient.

Market Failure

When a market fails to allocate its resources efficiently, market failure occurs. In the case of monopolies, abuse of power can lead to market failure. Market failure occurs when the price mechanism fails to take into account all of the costs and/or benefits of providing and consuming a good. As a result, the market fails to supply the socially optimal amount of the good. A monopoly is an imperfect market that restricts output in an attempt to maximize profit. Market failure in a monopoly can occur because not enough of the good is made available and/or the price of the good is too high. Without the presence of market competitors it can be challenging for a monopoly to self-regulate and remain competitive over time.

Imperfect competition: This graph shows the short run equilibrium for a monopoly. The gray box illustrates the abnormal profit, although the firm could easily be losing money. A monopoly is an imperfect market that restricts the output in an attempt to maximize its profits.