Canada: Canada Should Avoid Costly Ex Ante Regulation Of Digital Markets

In the March 30, 2023 comments submitted by Fasken¹ in response to the Government of Canada's consultation and discussion paper² on the Future of Competition Policy in Canada (the "Discussion Paper"), significant concerns are raised about any amendments that move away from identifying anti-competitive conduct through evidence-based assessment of its effects and which would establish ex ante regulation to place blanket prohibitions on certain types of conduct by certain firms. In a paper recently published by the Competition Policy International³, we examine the international and Canadian debate around ex ante regulations for Big Tech platform companies. The paper explores the need for and costs associated with ex ante regulation and concludes that pursuing such regulations at this time in Canada would be ill-advised.

While the Discussion Paper does not expressly suggest the adoption of sector-specific ex ante regulation, it does refer to the ongoing international policy debate regarding the deterrent value that competition enforcement may have.⁴ This is often tied to calls for ex ante regulatory rules or calls to "break up" digital giants.⁵ It also notes that sector-specific ex ante regulation generally falls outside the purview of the Competition Act (the "Act") and, in many cases, is reserved for provincial jurisdiction in Canada's federal system.⁶ Also of note, the submissions made by the Competition Bureau (the "Bureau") to the Government did not call for sector-specific ex ante regulation. However, other submissions made in response to the Discussion Paper raised the use of such ex ante regulation. The views differed across these submissions, with some stakeholders arguing that sector-specific ex ante regulation should be explored or adopted⁷ and others arguing against the adoption of such ex ante regulation.⁸

(a) No Compelling Need For Ex Ante Regulation

On account of allocative inefficiencies generated by sector regulations, competition authorities around the world advocate with governments and policymakers to rely on market forces and competition law oversight unless there is clear evidence of market failure. It is notable that no empirical economic evidence is offered to support the proposition that there has, in fact, been market failure when it comes to digital markets. One should not confuse concerns relating to enforcement failure (such as investigations taking too long) with market failure. Until there is credible evidence of real market failure, competition policymakers should exercise caution in resorting to ex ante regulation, lest it does more harm than good.

(b) Significant Cost of Ex Ante Regulation

When appropriate, sector regulation can promote important social goals, including the protection of workers, public health, safety and the environment. That said, economists widely recognize that complying with regulation increases both direct costs (e.g., resources devoted to the administration of and compliance with regulation) and indirect costs (e.g., costs that result from regulation that affects market structures or consumption patterns). These substantial regulatory costs create barriers to entry, limit competition and impose opportunity costs, which, in turn, result in barriers to innovation, decreased choice, reduced quality and higher prices.

By way of example, the European Union's Digital Markets Act (the "DMA"), which came into force and effect on May 2,2023, is considered an ex ante instrument that seeks to pre-emptively fix digital markets in anticipation of harm. A recent study ⁹ estimates that the economic impact of the EU shifting from ex post to ex ante regulation for digital platforms "is ... a loss of about 85 billion EUR in GDP and 101 billion EUR in lost consumer welfare based on a baseline value of 2018". They also estimate that the DMA "will reduce the labour force by 0.9 %". Similarly, Professor Sokol examined the impact of DMA-like regulations in China (in the form of anti-monopoly guidelines) on entrepreneurship. According to Professor Sokol, the data showed that "[a]fter release of the anti-monopoly guidelines, the average number of investments by platform CVC [corporate venture capital] experienced a volatile decline".¹⁰ Based on these results, Professor Sokol concluded that "China's platform regulation has a chilling effect on entrepreneurship",¹¹ which, in turn, has a chilling effect on innovation. These two studies suggest that the implementation of ex ante regulation in Canada would likely result in similar costs in Canada, including lower GDP, lost consumer welfare and a reduced labour force.

(c) Sector-Specific Ex Ante Regulation Inappropriate for Canada

In summary, Canadian policymakers should have cause for concern when it comes to adopting any DMA style ex ante regulations in Canada for the following reasons.

First, there is no clear evidence substantiating the need for such regulation (i.e., there is no clear evidence of market failure), the implementation of which would give rise to significant costs and unintended consequences.

Second, to the extent that the need for ex ante regulation stems from a desire for timely resolutions of enforcement over alleged anti-competitive conduct in the fast-moving digital sector, the existing framework of the Act could, to the extent necessary, be modified and tweaked to address this specific issue. Employing ex ante regulation (with its attendant costs) to remedy slow investigative and adjudication processes is analogous to using a sledgehammer to swat flies. Sector-specific sector ex ante regulation is the wrong tool if it is meant to remedy enforcement failure. It should be reserved to remedy instances of market failure.

Third, it is unclear whether amending the Act to specifically regulate the digital platforms would pass constitutional muster. In this regard, in its decision in General Motors v. National Leasing, the Supreme Court of Canada identified five criteria to consider when determining the constitutional validity of a civil legislative provision pursuant to the "general trade and commerce" power, including whether the impugned is concerned with trade as a whole rather than with a particular industry.¹² Given this criterion, it is questionable whether ex ante regulation of just Big Tech platform companies would be found to be a valid exercise of federal legislative jurisdiction under the general trade and commerce power.

Footnotes

1. Huy Do and Antonio Di Domenico, "Submission in response to the Government of Canada's consultation and discussion paper on the Future of Competition Policy in Canada", Comment on Competition Policy, Department of Innovation, Science and Economic Development, The Future of Competition Policy in Canada, Catalogue No Iu173-40/2022E-PDF (Ottawa: 2022).

2. Innovation, Science and Economic Development Canada, "The Future of Competition Policy in Canada" (November 17, 2022), available online (PDF).

3. John Pecman, Huy Do & Peter Mangaly, "Beware Ex Ante Regulation: Introducing "Cut and Paste" Ex Ante Regulations in Canada Against Select Big Tech Companies is Just Bad Economic and Legislative Policy" (April 20, 2023), available online.

4. Ex-ante regulation is aimed at identifying issues in the market beforehand and shaping stakeholder behaviour and responses through regulatory intervention.

5. Edward M. Iacobucci, "Examining the Canadian Competition Act in the Digital Era" (September 27, 2021), available online (PDF) at 49.

6. Supra, note 2 at 13.

7. See, for example, Vass Bednar, "Senator Wetston Response re: Examining the Canadian Competition Act in the Digital Era Consultation Paper" (December 15, 2021), available online (PDF) at 12; Keldon Bester, "Submission: Examining the Canadian Competition Act in the Digital Era" (December 15, 2021), available online (PDF) at 5; and Vivica Research, "Study of Competition Issues in Data-Driven Markets in Canada" (January 2022), available online at 2.

8. See, for example, Anthony Niblett and Daniel Sokol, "Up to the Task: Why Canadian's don't need sweeping changes to competition policy to handle Big Tech" (November 2021), available online (PDF).

9. Hosuk Lee-Makiyama and Badri Narayanan Gopalakrishnan, "Economic Costs of Ex Ante Regulations", Ecipe Occasional Papers (October 2020), available online.

10. Daniel Sokol, "Big Tech Regulation and Tech Entrepreneurship: Evidence from China" (2023) University of Southern California Working Paper at 11.

11. Ibid, at 25.

12. General Motors of Canada Ltd. v. City National Leasing, [1989] 1 SCR 641 at 655-663.

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