Innovation Effects in Canadian Merger Analysis

Scholars Panel on Non-Price Effects: Turning Smoke Into Fire

Abstract

Recent amendments to the Canadian Competition Act direct the Competition Tribunal to consider non-price competitive effects under the merger and other civil provisions of the Act. This commentary first provides an overview of the economics literature on the effects of mergers on innovation incentives, and then summarizes the challenges to mergers that potentially threaten innovation by antitrust authorities in the US and Europe, and the much smaller number of such challenges in Canada. Canadian real GDP per capita and innovation by Canadian businesses, which are keys to Canadians’ standards of living, lag other advanced economies. This commentary considers whether the fact that relatively few mergers have been challenged by the Competition Bureau on the basis of concerns about innovation effects may be a partial cause of lagging innovation in Canada. It concludes that there is little evidence that innovation-reducing mergers in Canada have been allowed because of deficiencies in the Act, Tribunal jurisprudence, or Bureau enforcement practices. Several commentators have noted that the relatively poor innovation performance of Canadian businesses is likely caused in part by the challenges that start-ups face in obtaining sufficient financing to successfully commercialize their innovations, and by Canada’s relatively weak intellectual property rights regime, which can make it difficult for Canadian business to capture more of the returns from their investments in innovation. Mergers can help overcome these challenges, such that more aggressive merger enforcement can undermine firms’ investment incentives. Repeal of the Section 96 efficiencies defence, if Bill 56 is enacted, may also reduce incentives to invest in innovation in some cases.