McConnell Campbell R., Brue Stanley L., Barbiero Thomas P. Microeconomics. Ninth Edition

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330 Part Two • Microeconomics of Product Markets

1994 Marc Andreessen starts up

Netscape Communications and

markets Netscape Navigator,

which quickly becomes the lead-

ing software browser for the

emerging Internet. David Filo

and Jerry Yang develop Yahoo,

a system for locating material

stored on the Internet.

1995 Microsoft releases Win-

dows 95 operating system, which

becomes the dominant operat-

ing system of personal comput-

ers (90 percent market share).

Microsoft is now well estab-

lished as the world’s leading

software producer. Sun Micro-

systems introduces Java, an In-

ternet programming language.

1996 Playing catch-up with

Netscape, Microsoft develops

Microsoft Internet Explorer and

gives it away free.

1999 Netscape’s market share

plunges and it merges with

American Online. More than 100

million personal computers are

manufactured worldwide in this

year alone.

2000 A federal court rules that

Microsoft is an abusive monop-

oly and orders it broken into two

companies, one that sells is op-

erating system and another that

sells its applications. Microsoft

appeals the case to a higher

court. Half of American house-

holds are online and the Internet

emerges as a major technologi-

cal revolution worldwide. Inter-

net commerce in the United

States reaches $300 billion and

an estimated 1.2 million U.S.

jobs are Internet-related.

Source: Based partly on Diedtra

Henderson, “Moore’s Law Still

Reigns,” Seattle Times, Nov. 24, 1996.

Augmented and updated.

chapter summary

1. Technological advance is evidenced by new

and improved goods and services and new

and improved production or distribution

processes. In economists’ models, technolog-

ical advance occurs only in the very long run.

2. Invention is the discovery of a product or

process through the use of imagination,

ingenuity, and experimentation. Innovation

is the ﬁrst successful commercial introduc-

tion of a new product, the ﬁrst use of a new

method, or the creation of a new form of

business enterprise. Diffusion is the spread

of an earlier innovation among competing

ﬁrms. Firms channel a majority of their R&D

expenditures to innovation and imitation,

rather than to basic scientiﬁc research and

invention.

3. Historically, most economists viewed tech-

nological advance as a random, external

force to which the economy adjusted. Many

contemporary economists see technological

advance as occurring in response to proﬁt

incentives within the economy and thus as

an integral part of capitalism.

Entrepreneurs and other innovators try to

anticipate the future. They play a central role in

technological advance by initiating changes in

products and processes. Entrepreneurs often

form start-up ﬁrms that focus on creating and

introducing new products. Sometimes, inno-

vators work in the R&D labs of major corpora-

tions. Entrepreneurs and innovative ﬁrms

often rely heavily on the basic research done

by university and government scientists.

5. A ﬁrm’s optimal amount of R&D spending

occurs where its expected return (marginal

beneﬁt) from R&D equals its interest-rate

cost of funds (marginal cost) to ﬁnance R&D.

Entrepreneurs and ﬁrms use several sources

to ﬁnance R&D, including (a) bank loans,

(b) bonds, (c) venture capital (funds lent in

return for a share of the proﬁts if the busi-

ness succeeds), (d) undistributed corporate

proﬁts (retained earnings), and (e) personal

savings.

6. Product innovation, the introduction of new

products, succeeds when it provides con-

sumers with higher marginal utility per

chapter twelve • technology, r&d, and efﬁciency 331

dollar spent than existing products do. The

new product enables consumers to obtain

greater total utility from a given income.

From the ﬁrm’s perspective, product innova-

tion increases net revenue sufﬁciently to

yield a positive rate of return on the R&D

spending that produced the innovation.

7. Process innovation can lower a ﬁrm’s pro-

duction costs by improving its internal pro-

duction techniques. Such improvement

increases the ﬁrm’s total product, thereby

lowering its average total cost and increas-

ing its proﬁt. The added proﬁt provides a

positive rate of return on the R&D spending

that produced the process innovation.

8. Imitation poses a potential problem for inno-

vators, since it threatens their returns on

R&D expenditures. Some dominant ﬁrms

use a fast-second strategy, letting smaller

ﬁrms initiate new products and then quickly

imitating the successes. Nevertheless, sig-

niﬁcant protections and potential beneﬁts go

to ﬁrms that take the lead with R&D and

innovation, including (a) patent protection,

(b) copyrights and trademarks, (c) lasting

brand-name recognition, (d) beneﬁts from

trade secrets and learning by doing, (e) high

economic profits during the time lag

between a product’s introduction and its imi-

tation, and (f) the possibility of lucrative buy-

out offers from larger ﬁrms.

9. Each of the four basic market structures has

potential strengths and weaknesses regard-

ing the likelihood of R&D and innovation.

The inverted-U theory holds that a ﬁrm’s

R&D spending as a percentage of its sales

rises with its industry four-ﬁrm concentra-

tion ratio, reaches a peak at a 50 percent

concentration ratio, and then declines as

concentration increases further. Empirical

evidence is not clear-cut but lends general

support to this theory. For any speciﬁc indus-

try, however, the technological opportunities

that are available may count more than mar-

ket structure in determining R&D spending

and innovation.

10. In general, technological advance enhances

both productive and allocative efﬁciency.

But in some situations patents and the

advantages of being ﬁrst with an innovation

can increase monopoly power. While in

some cases creative destruction eventually

destroys monopoly, most economists doubt

that this process is either automatic or

inevitable.

11. Consumer surplus is the difference between

what a consumer is willing to pay for an

additional unit of a product or service and its

market price. Producer surplus is the differ-

ence producers receive for a product or serv-

ice less the marginal cost of producing it.

Efﬁciency in a market is realized when the

sum of consumer surplus and producer sur-

plus is maximized. Reductions in consumer

surplus and producer surplus from their

maximums is referred to as deadweight loss.

terms and concepts

technological advance,

p. 305

very long run, p. 305

invention, p. 305

patent, p. 305

innovation, p. 305

product innovation, p. 306

process innovation, p. 306

diffusion, p. 306

start-ups, p. 308

venture capital, p. 310

interest-rate cost-of-funds

curve, p. 310

expected-rate-of-return curve,

p. 311

optimal amount of R&D, p. 312

imitation problem, p. 316

fast-second strategy, p. 317

inverted-U theory of R&D,

p. 321

creative destruction, p. 323

consumer surplus, p. 325

producer surplus, p. 326

deadweight loss, p. 328

study questions

1. What is meant by technological advance, as

broadly deﬁned? How does technological

advance enter into the deﬁnition of the very

long run? Which of the following are exam-

ples of technological advance, and which are

not: an improved production process; entry

of a ﬁrm into a proﬁtable purely competitive

industry; the imitation of a new production

process by another ﬁrm; an increase in a

ﬁrm’s advertising expenditures?

332 Part Two • Microeconomics of Product Markets

2. Listed below are several possible actions by

ﬁrms. Write INV beside those that reﬂect

invention, INN beside those that reﬂect in-

novation, and DIF beside those that reﬂect

diffusion.

a. An auto manufacturer adds heated seats

as a standard feature in its luxury cars to

keep pace with a rival ﬁrm whose luxury

cars already have this feature.

b. A television production company pio-

neers the ﬁrst music video channel.

c. A ﬁrm develops and patents a working

model of a self-erasing whiteboard for

classrooms.

d. A light bulb ﬁrm is the ﬁrst to produce

and market lighting ﬁxtures with halogen

lamps.

e. A rival toy maker introduces a new Jenny

doll to compete with Mattel’s Barbie doll.

3. Contrast the older and modern views of

technological advance as they relate to the

economy. What is the role of entrepreneurs

and other innovators in technological

advance? How does research by universi-

ties and government affect innovators and

technological advance? Why do you think

some university researchers are becoming

more like entrepreneurs and less like pure

scientists?

KEY QUESTION Suppose a firm

expects that a $20 million expenditure on

R&D will result in a new product that will

increase its revenue by a total of $30 million

one year from now. The ﬁrm estimates that

the production cost of the new product will

be $29 million.

a. What is the expected rate of return on

this R&D expenditure?

b. Suppose the ﬁrm can get a bank loan at

6 percent interest to ﬁnance its $20 mil-

lion R&D project. Will the ﬁrm undertake

the project? Explain why or why not.

c. Now suppose the interest-rate cost of

borrowing, in effect, falls to 4 percent

because the ﬁrm decides to use its own

retained earnings to ﬁnance the R&D.

Will this lower interest rate change the

ﬁrm’s R&D decision? Explain.

KEY QUESTION Answer the lettered

questions in the next column on the basis of

the information in this table:

Amount of R&D, Expected rate of

millions return on R&D, %

$10 16

$20 14

$30 12

$40 10

$50 8

$60 6

a. If the interest-rate cost of funds is 8 per-

cent, what will be the optimal amount of

R&D spending for this ﬁrm?

b. Explain why $20 million of R&D spending

will not be optimal.

c. Why won’t $60 million be optimal either?

KEY QUESTION Refer to Table 12-1

and suppose the price of new product C is

$2 instead of $4. How does this affect the

optimal combination of products A, B, and C

for the person represented by the data?

Explain: “The success of a new product

depends not only on its marginal utility but

also on its price.”

7. Learning how to use software takes time. So

once customers have learned to use a par-

ticular software package, it is easier to sell

them software upgrades than to convince

them to switch to new software. What impli-

cations does this have for expected rates of

return on R&D spending for software ﬁrms

developing upgrades versus ﬁrms develop-

ing imitative products?

KEY QUESTION Answer the follow-

ing questions on the basis of this informa-

tion for a single ﬁrm: total cost of capital =

$1000; price paid for labour = $12 per labour

unit; price paid for raw materials = $4 per

raw-material unit.

a. Suppose the ﬁrm can produce 5000 units

of output by combining its ﬁxed capital

with 100 units of labour and 450 units of

raw materials. What are the total cost and

average total cost of producing the 5000

units of output?

b. Now assume the ﬁrm improves its pro-

duction process so that it can produce

6000 units of output by combining its

ﬁxed capital with 100 units of labour and

450 units of raw materials. What are the

total cost and average cost of producing

the 6000 units of output?

chapter twelve • technology, r&d, and efﬁciency 333

c. Refer to your answers to 8a and 8b and

explain how process innovation can im-

prove economic efﬁciency.

9. Why might a ﬁrm making a large economic

proﬁt from its existing product employ a

fast-second strategy in relationship to new

or improved products? What risks does it run

in pursuing this strategy? What incentive

does a ﬁrm have to engage in R&D when

rivals can imitate its new product?

10. Do you think the overall level of R&D would

increase or decrease over the next 20 to 30

years if the lengths of new patents were

extended from 17 years to, say, forever?

What if the duration were reduced from 17

years to, say, 3 years?

11. Make a case that neither pure competition

nor pure monopoly is conducive to a great

deal of R&D spending and innovation. Why

might oligopoly be more favourable to R&D

spending and innovation than either pure

competition or pure monopoly? What is the

inverted-U theory and how does it relate to

your answers to these questions?

12. Evaluate: “Society does not need laws

outlawing monopolization and monopoly.

Inevitably, monopoly causes its own self-

destruction, since its high proﬁt is the lure

for other ﬁrms or entrepreneurs to develop

substitute products.”

13. Distinguish between consumer surplus and

producer surplus. What is deadweight loss

and how does it relate to consumer surplus

and producer surplus?

14. (The Last Word) Identify a speciﬁc example

of each of the following in “The Last Word”:

(a) entrepreneurship, (b) invention, (c) inno-

vation, and (d) diffusion.

internet application question

1. Visit NASA’s Technology Transfer Office

<www.sti.nasa.gov/tto> to determine where

signiﬁcant commercial beneﬁts have been

realized from secondary use of NASA tech-

nology. Are there any that have been inconse-

quential? How does the NASA Commercial

Technology Network <nctn.hq.nasa.gov/>

move technology from the lab to the market-

place?

IN THIS CHAPTER

OU WILL LEARN:

What industrial

concentration is.

•

About the evolution of

Canadian competition

(anti-combines) policy

and its current aims.

•

The deﬁnition of social

regulations and what

their goals are.

•

What a natural monopoly is

and why governments

regulate natural monopolies.

Competition

Policy and

Regulation

n the spirit of the TV show “Who Wants

to be a Millionaire?” try to answer these

questions.

● Which one of the following companies

was found guilty of violating Canadian

anti-combines laws: (a) Napster, (b) Micro-

soft, (c) Lafarge, (d) Colgate-Palmolive.

Final answer?

● Business ﬁrms subject to industrial reg-

ulation are often called (a) unnatural

monopolies, (b) monopolistic competitors,

answer?

● The requirement that businesses make

reasonable accommodations for disabled

workers and customers is an example of

(a) anti-combines policy; (b) an externality;

Final answer?

The answer, in order, are (c), (d), and (c).

THIRTEEN

In this chapter we look at three sets of government policies toward business: anti-

combines policy, industrial regulation, and social regulation. Anti-combines policy

consists of the laws and government actions designed to prevent monopoly and pro-

mote competition. Industrial regulation consists of government regulation of ﬁrms’

prices (or rates) within selected industries. Social regulation is government regula-

tion of the conditions under which goods are produced, the physical characteristics

of goods, and the impact of the production and consumption of goods on society.

In Chapter 10 we developed and applied a strict deﬁnition of monopoly. A pure

monopoly, we said, is a one-ﬁrm industry—a situation whereby a unique product is

being produced entirely by a single ﬁrm and entry to the industry is totally blocked.

In this chapter we will use the term industrial concentration to include pure

monopoly and markets in which much potential monopoly power exists. Industrial

concentration occurs whenever a single ﬁrm or a small number of ﬁrms control the

major portion of the output of an industry. One, two, or three ﬁrms dominate the

industry, potentially resulting in higher-than-competitive prices and proﬁts. This

deﬁnition, which is closer to how the general public understands the monopoly

problem, includes many industries we have previously designated as oligopolies.

Industrial concentration in this chapter thus refers to industries in which ﬁrms

are large in absolute terms and in relation to the total market. Examples are the tele-

phone equipment industry, in which Nortel, large by any standard, dominates the

market; the automobile industry, where General Motors of Canada, Ford of Canada,

and DaimlerChrysler Canada are dominant; the chemical industry, dominated by

Petro-Canada, Imperial Oil (Exxon), and Shell Canada; the aluminum industry,

where industrial giant Alcan Aluminum reigns supreme; and the steel industry,

where the two large producers, Dofasco, formerly Dominion Foundries & Steel, and

Stelco, formerly Steel Company of Canada, command the lion’s share of the market.

The underlying purpose of anti-combines policy (antimonopoly policy) is to pre-

vent industrial concentration or monopolization, to promote competition, and to

achieve allocative efﬁciency. Although all economists would agree that these are

meritorious goals, conﬂicting opinions exist about the effectiveness of Canadian

anti-combines policy. As we will see, anti-combines policy over the years has been

neither clear-cut nor consistent.

Historical Background

With the advent of Confederation in 1867, local markets began to widen into

national markets because of improved transportation facilities, mechanized pro-

duction methods, and sophisticated corporate structures. In the 1880s and 1890s car-

tels emerged in several industries, including the cotton textile, salt, twine, ﬂour,

canning and packing, and tobacco industries.

Firms often used questionable tactics to monopolize these industries and then

charged monopoly prices to customers and extracted price concessions from resource

suppliers. Farmers and owners of small businesses were particularly vulnerable to

the power of large corporate monopolies and were among the ﬁrst to oppose them.

Consumers, labour unions, and economists were not far behind in their opposition.

chapter thirteen • competition policy and regulation 335

Deﬁnition of Industrial Concentration

anti-

combines

policy

The laws

and government

actions designed to

prevent monopoly

and promote

competition.

The Anti-Combines Laws

The Role of

Governments

The main economic case against monopoly is familiar to you from Chapter 10.

Monopolists tend to produce less output and charge higher prices than if their

industries were competitive. With pure competition, production occurs where P =

MC. This equality represents an efﬁcient allocation of resources because P measures

the marginal beneﬁt to society of an extra unit of output, while marginal cost MC

reﬂects the cost of an extra unit. When P = MC, society cannot gain by producing

one more or one less unit of the product. In contrast, a monopolist maximizes proﬁt

by equating marginal revenue (not price) with marginal cost. At this MR = MC

point, price exceeds marginal cost, meaning that society would obtain more beneﬁt

than it would incur cost by producing extra units. There is an underallocation of

resources to the monopolized product, and so the economic well-being of society is

less than it would be with greater competition.

Government concluded in the late nineteenth century that market forces in

monopolized industries did not provide sufﬁcient control to protect consumers,

achieve fair competition, and achieve allocative efﬁciency. So, it instituted two

alternative means of control as substitutes for, or supplements to, market forces.

● Regulatory agencies In the few markets where the nature of the product or

technology creates a natural monopoly, the government established public reg-

ulatory agencies to control economic behaviour.

● Anti-combines laws In most other markets, social control took the form of

anti-combines (antimonopoly) legislation designed to inhibit or prevent the

growth of monopoly.

We will shortly review the anti-combines legislation that, as reﬁned and extended

by various amendments, constitutes the basic law of the land with respect to cor-

porate size and concentration. Before we do, let’s examine merger types.

Merger Types

Three basic types of mergers can occur, as represented in Figure 13-1. This ﬁgure

shows two stages of production, one the input stage, the other the ﬁnal-good stage

of two distinct ﬁnal-good industries: autos and blue jeans. Each rectangle (A, B, C

… X, Y, Z) represents a particular ﬁrm.

A horizontal merger is a merger between two competitors selling similar prod-

ucts in the same market. In Figure 13-1 this type of merger is shown as a combina-

tion of glass producers T and U. Examples of horizontal mergers would be the

buyout of Eatons by Sears and Air Canada’s merger with Canadian Airlines.

A vertical merger is a merger between ﬁrms at different stages of the production

process. In Figure 13-1 the merger between ﬁrm Z, a denim fabric producer, and ﬁrm

F, a blue jeans producer, is a vertical merger. Vertical mergers involve ﬁrms having

buyer–seller relationships. Examples of mergers of this type are PepsiCo’s mergers

with Pizza Hut, Taco Bell, and Kentucky Fried Chicken. PepsiCo supplies soft

drinks to each of these fast-food outlets.

A conglomerate merger is ofﬁcially deﬁned as any merger that is not horizontal or

vertical; in general, it is the combination of ﬁrms in different industries or ﬁrms oper-

ating in different geographical areas. Conglomerate mergers can extend the line of

products sold, or combine totally unrelated companies. In Figure 13-1, the merger

between ﬁrm C, an auto manufacturer, and ﬁrm D, a blue jeans producer, is a con-

glomerate merger. A real-world example of a conglomerate is Power Corporation of

Canada, headquartered in Montreal. Among its holdings are Great-West Life Co., Inc.,

336 Part Two • Microeconomics of Product Markets

anti-

combines

(anti-

monopoly)

legislation

Laws designed to

prevent the growth

of monopoly.

horizontal

merger

merger between two

competitors selling

similar products in

the same market.

vertical

merger

The

merger of ﬁrms

engaged in different

stages of produc-

tion process of a

ﬁnal product.

conglomer-

ate merger

The merger of a ﬁrm

in one industry with

a ﬁrm in another

industry or region.

<www.iln.com/articles/

canada.html#12>

Foreign investment

and anti-combines law

a life insurance subsidiary, and Power Broadcast Inc., a subsidiary that owns news-

papers and radio stations. In Europe, Power Corporation has investments in major

communications, industrial, energy, utility, ﬁnancial services, and food companies.

We now turn to look at the evolution of anti-combines legislation in Canada.

The Evolution of Anti-Combines Legislation

THE ACT OF 1889

Canadian anti-combines legislation began in 1889 with the passage of an Act that

made it a misdemeanour to conspire to restrict either trade, output, or competition.

Three years later, the Act of 1889 became a section of the Criminal Code and the

offence became an indictable one. In the ﬁrst ten years of the twentieth century there

were six prosecutions under the section, resulting in four convictions. Securing evi-

dence to get a conviction under the Criminal Code was particularly difﬁcult, and

further changes became necessary.

COMBINES INVESTIGATION ACT, 1910

The result was the passing of the Combines Investigation Act in 1910, an Act whose

name was changed in June 1986, when it became the Competition Act. The 1910 Act

authorized a judge, on receiving an application by six persons, to order an investi-

gation into an alleged combine.

The 1910 Act was unsuccessful for two reasons: (1) rarely could six private citi-

zens be found willing to bear the publicity and expense of initiating an investiga-

tion; (2) each investigation, if and when ordered by a judge, started afresh; no

person or body administered the Act continuously. Thus, there was only one inves-

tigation under the Act before World War I.

The next 50 years saw no fundamental change. Of note were the 1952 amend-

ments to the Act, which split the duties of the combines commissioner and assigned

them to two separate agencies—one for investigation and research, the other for

appraisal and report. Thus were established a director of investigation and research

chapter thirteen • competition policy and regulation 337

FIGURE 13-1 TYPES OF MERGERS

ABC D EF

TUV WXYZ

Autos

Glass

Blue

jeans

Denim

fabric

Automobiles Blue jeans

Conglomerate merger

Horizontal merger Vertical merger

Horizontal mergers

(T + U) bring together

ﬁrms selling the same

product in the same

geographical market;

vertical mergers

(F + Z) connect ﬁrms

having a buyer–seller

relationship; and con-

glomerate mergers

(C + D) join ﬁrms in

different industries

or ﬁrms operating in

different geographi-

cal areas.

combines

investiga-

tion act

The

Act, in 1910, that

authorized a judge,

on receiving an

application by six

people, to order an

investigation into

an alleged combine;

became the Compe-

tition Act in 1986.

and a Restrictive Trade Practices Commission, the latter being superseded in June

1986 by the Competition Tribunal (see below).

In 1960, the Combines Investigation Act was at last amended to include the pro-

visions relating to combinations that had been laid down in the Criminal Code since

1892. As well, mergers and monopolies now were deemed unlawful only if a

“detriment or against the interest of the public.”

In 1967, the newly formed Department of Consumer and Corporate Affairs took

over responsibility for combines, mergers, monopolies, and restraint of trade.

Shortly thereafter, in 1969, the Economic Council of Canada reported that the pro-

visions of the Combines Investigation Act making mergers and monopolies crimi-

nal offences were “all but inoperative” because a criminal offence had to be proved

“beyond a shadow of a doubt”—a very difﬁcult task. However, the Economic Coun-

cil did not recommend barriers be placed in the way of a company achieving dom-

inance through internal growth or superior efﬁciency. The Economic Council’s

whole approach then was based on the goal of economic efﬁciency. It was this same

approach that led the Economic Council to recommend that competition policy be

extended to services.

On January 1, 1976, new amendments to the Combines Investigation Act became

effective, with the result that it became applicable to services as well.

THE COMPETITION ACT, 1986

Successive governments in Ottawa have attempted to bring about changes to

Canada’s law governing monopolies. Three attempts, Bills brought before Parlia-

ment in 1971, 1977, and 1977–79, met with opposition from business. Extensive con-

sultations with the private sector and provincial governments preceded the

introduction of yet another Bill in 1984. The 1984 election intervened and this Bill,

too, was never enacted.

Finally, in June 1986, Parliament passed the Competition Tribunal Act and the

Competition Act, the latter being the new name for the Combines Investigation Act.

Some of the major changes are worth noting.

Civil Law Framework Uncompetitive market structures (monopoly and oligopoly)

and uncompetitive structural change (merger) now come under the jurisdiction of

the civil law, making it easier to prosecute those mergers and monopolies not in the

public interest. Some behaviour, such as price ﬁxing, is still handled by the regular

courts, where the standard of evidence is “beyond a reasonable doubt” and the

penalties are harsh. A competition tribunal adjudicates under a civil law frame-

work that permits the issuing of remedial orders to restore and maintain competi-

tion in the market. The tribunal is made up of judges of the Federal Court and

laypersons, with a judge as chairperson. The Restrictive Trade Practices Commis-

sion was abolished as a result.

Two additional points can be made. The Competition Act does not directly attack

monopoly; nothing is wrong with having 100 percent of the market. But abuse of a

monopoly position can be attacked.

Recent Cases

The Competition Act is designed to achieve economic efﬁciency and to be adaptable

to changing market conditions and international trade. Only those mergers result-

ing in an unacceptable lessening of competition can be prohibited or modiﬁed by

the competition tribunal. Mergers that result in efﬁciency gains through capturing

economies of scale have generally been allowed.

338 Part Two • Microeconomics of Product Markets

competition

act

The Act that

replaced the Com-

bines Investigation

Act in 1986.

competition

tribunal

government body

that adjudicates

under a civil law

framework that per-

mits the issuing of

remedial orders to

restore and main-

tain competition in

the market.

<canada.justice.gc.ca/

en/laws/C-36.4/

index.html>

Competition Tribunal

Act (R.S. 1985, c. 19

[2nd Supp.])

The Competition Bureau recommended allowing the merger of Air Canada and

Canadian Airlines in 1999, provided the federal government opened up the Cana-

dian market to foreign competition. Canadian Airlines was in ﬁnancial difﬁculty

and it was doubtful that it could survive on its own. Much can be said for the merger

of Air Canada and Canadian Airlines on efﬁciency grounds, but concern is justiﬁed

among the public about market concentration unless the federal government decides

to pursue the so-called open skies policy.

The Competition Bureau recommended against chartered bank mergers in 1998,

when the Royal Bank of Canada and the Bank of Montreal announced their intention

to merge. Soon after, the Canadian Imperial Bank of Commerce and the Toronto Domin-

ion Bank also decided to merge. The banks argued that they needed to merge to cap-

ture economies of scale and be able to compete internationally. The Competition Bureau

was not convinced by the banks’ argument, citing fears that competition would be

greatly curtailed in smaller centres for both consumers and small and medium-sized

ﬁrms. The Bureau noted that even if more foreign banks were allowed to compete in the

Canadian market, the large established network of branches by the Canadian banks

provided a large barrier to entry for any new competitor. The Royal Bank of Canada and

the Bank of Montreal were, however, successful in merging their credit card operations.

Issues of Enforcement: Tradeoffs among Goals

Promoting competition is only one of society’s goals and strict enforcement of the anti-

combines laws may sometimes conﬂict with some other goal. Here are two examples.

BALANCE OF TRADE

Government seeks ways to increase exports to pay for imports. Anti-combines

actions that undo a merger between two chemical suppliers, or dissolve a microchip

or software monopolist, might weaken the targeted ﬁrm, thereby reducing its com-

petitiveness and sales abroad. Consequently, Canadian exports might decline and

thus create or increase the nation’s trade deﬁcit. Should government strictly enforce

anti-combines laws, even when signiﬁcant amounts of Canadian exports are at

stake? Or should the anti-combines goal of efﬁciency be superseded by the goal of

balancing exports and imports?

EMERGING NEW TECHNOLOGIES

Occasionally, new technologies combine to create new products and services. A cur-

rent example is the meshing of computer and communications technologies relat-

ing to the Internet. This interactive network has improved the communications

capabilities of households, businesses, and governments across the globe. It also

enables people to access unprecedented amounts of information and directly buy

and sell goods and services. The emergence of this new technology has set off a

spate of megamergers among entertainment companies, telecommunication com-

panies, computer manufacturers, and software producers.

Should the government strictly enforce anti-combines laws to block some of those

mergers, speciﬁcally ones that produce dominant ﬁrms and threaten to reduce com-

petition? Or should the government temporarily suspend anti-combines rules to

encourage the restructuring of industries and speed the expansion of this new tech-

nology? Hastening the advance of Internet-related technologies might also increase

Canadian exports of electronic services.

Each of these enforcement tradeoffs, by itself, triggers controversy. Some argue

that the gains from an anti-combines policy must be weighed against the effects of

chapter thirteen • competition policy and regulation 339

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Competition Bureau