In recent years, Canada has sprouted a host of anti-big and corporate proponents following in the footsteps of U.S. neo-Brandeisians to dismantle large firms in favor of small ones. While the United States has the American Economic Liberties Project and Open Markets Institute leading its charge against bigness, Canada has comparable policy advocates pursuing a similar mission. For example, the Canadian Anti-Monopoly Project think tank asserts, “One of the purposes of the current Competition Act is ensuring that small and medium sized businesses have an equitable opportunity to compete in the Canadian economy…Canada needs competition policy that enables the entry and flourishing of new businesses, rather than supporting the creation of theoretically efficient oligopolies.”

The Competition Bureau of Canada (the Bureau, Competition Bureau) released a report in 2023 to assess the state of competition. The report contends that “Canada’s competitive intensity has decreased from 2000 to 2020…The result is that both consumers and businesses have seen fewer of the benefits that greater competition offers.” The report uses various economic measures, such as concentration and markups, to supposedly show that market competition has declined.

Key Message

However, upon closer examination, this report has several methodological and interpretation issues that raise doubts about whether their conclusion about the state of competition in Canada is accurate. As such, policymakers should be wary about using the report as the foundation of competition policymaking, which is what the report implied when it stated that “our findings… show how essential it is to modernize Canada’s competition laws to respond to the realities of today’s economy.” More importantly, this report does not provide empirical backing for those advocating for a more aggressive antitrust regime. In short, the report appears to use data to support a preconceived belief that concentration is a problem in Canada in order to justify unneeded changes in Canadian competition law and regulation. However, this approach will likely harm the competitiveness of Canadian companies, especially those seeking to grow.

This analysis first describes the report before turning to its findings for each competitive intensity measure, its implications, and its methodological and interpretation problems.

The Report

The report analyzed Statistics Canada data from 2000 to 2020 consisting of all Canadian firms that filed taxes to examine how competition has evolved using structural and performance indicators of competition. Structural indicators included concentration, rank stability, entry and exit rates, survival rates, and economies of scale. Meanwhile, performance indicators included profits, markups, and profit elasticity with respect to costs. As the report highlighted, “These indicators, or measures, help us understand how the industries that firms compete within are structured and how firms perform as a result of competition.” The majority of the report examined the trend in these indicators for the overall economy.

Findings, Implications, and Concerns

Data at the 3- and 4-Digit North American Industry Classification System (NAICS) Level

The first problem with the report that raises doubts about its conclusion that competition has declined is the use of 3- and 4-digit NAICS industry data to analyze Canada’s competitive environment. As the report asserted, “most of our analysis is done using information at the 4-digit NAICS code level,” which includes concentration ratios, entry and exit rates, and markup measures. This measurement is problematic because, as ITIF has previously asserted, “To be meaningful, [measures of competition] must refer to a specific market, which can sometimes be done using NAICS codes. To be useful, markets should be defined as specifically as possible.”

Yet, 3- and 4-digit NAICS levels represent only subsector and industry groups and are not as detailed as 6-digit industry level data, meaning they tend to include more industries that may not compete against each other. For example, Furniture and Home Furnishing Retailers (NAICS: 4491) and Electronic and Appliance Retailers (NAICS: 4492) are both under the same 3-digit subsector, Furniture, Home Furnishings, Electronics, and Appliance Retailers (NAICS: 449). However, it is nonsensical to argue that a couch from a furniture retailer is a substitute for a blender from an electronics store. As such, measures of competition at the 3- or 4-digit NAICS levels are unlikely to show Canada’s true state of competition.

Concentration

Disregarding the issue with data choice, the Bureau’s report found that the most concentrated industries’ concentration (using revenue data) has increased, and the number of industries considered ‘highly concentrated’ with a Herfindahl-Hirschman Index (HHI) of over 2,500 has also increased from 2005 to 2018. As such, it implied that market competition has declined in the Canadian economy as a few firms increased their market shares in their respective industries, allowing them to raise prices and increase profit rates. Indeed, as the report asserted, “if a market is more concentrated, it is easier for firms to increase their prices and make profits above what we would expect to see in a competitive setting.” However, the report’s measures of concentration have methodological problems, raising doubts about whether competition has actually declined in recent decades.

• Not Accounting for Imports: The first problem with the concentration measure is the failure to account for imports. Indeed, the report asserted that their data “does not account for products and services bought by Canadians from foreign firms (imports).” However, a recent paper by Amiti and Heise showed that including foreign competition, as measured with import penetration, in concentration measures makes the difference between whether overall concentration has risen or remained unchanged. The authors found that rising foreign competition increased concentration among U.S. firms from 1992 to 2012, but overall concentration, which includes foreign firms competing in U.S. markets, remained unchanged.
• HHI Declined: The report claimed that the concentration of the top 10 most concentrated industries rose 8.6 percent, while the top 25 percent rose 10.7 percent from 2005 to 2018. However, this does not necessarily signal that competition has declined (concentration for 75 percent of industries remained unchanged). In fact, this is the case as the average HHI for all industries decreased from an HHI of 800 to 790.
• Distribution of Market Shares Remain Relatively Unchanged: The report found that HHI rose from 2,818 to 3,060 for the top 10 percent of most concentrated industries and 1,942 to 2,149 for the top 25 percent from 2005 to 2018. However, HHI shows the distribution of firms’ market shares (a higher number means a single firm has more market share; a lower number means a more even distribution). As such, since HHI did not change significantly for the top 10 and 25 percent, firms also had about the same market shares, meaning that competition also likely remained relatively the same.
• Using a Different Base Year Shows Concentration Declined: The top 10 and 25 percent of most concentrated industries were not at their highest concentration level in 2018. Instead, concentration for these two groups rose in the first five years, peaked in 2009, and has followed a downward trajectory since. As such, a base year of 2009 would show that concentration is declining for these two groups. More importantly, overall concentration likely declined since the concentration in the other 75 percent of industries remained relatively unchanged, signaling greater overall competition. To the extent that Canada had a competition problem, it has been declining since 2009.
• Only a Minor Increase in the Number of Highly Concentrated Industries: The report claimed that the number of industries with a CR10 (market share of the 10 largest firms) of over 80 percent has increased from 2005 to 2018. Yet, upon closer inspection, the increase was only 3 of over 300 industries, meaning the increase in concentration for these 3 industries could be canceled out by changes in the remaining industries. In such cases, competition remains unchanged. This is likely because the report shows industries with low and medium concentration levels experienced declining average concentration. This logic also applies if HHI was the measure.
• CR10 Can Show Industries are Unconcentrated: Moreover, a CR10 ratio also does not reveal much about the state of competition. This is because 10 firms with 80, 90, or even 100 percent of the market could still be competitive, with each firm having very little market power (firms having as low as 8 to 10 percent market shares).
• CR3 Shows Concentration Declined: The report concluded in the appendix that the concentration ratio of the three largest firms, a better measure of concentration, has declined for all industries from 2005 to 2018, indicating an increase in competition.

Firm Entry and Exit Rates

The Bureau’s report found that firm entry rates declined from 11.8 percent to 9 percent, while exit rates declined from 13.4 percent to 12.3 percent from 2001 to 2020. As a result, the report asserted that competition has declined because industry dynamism has declined. Indeed, the report claimed, “The threat that new competitors will enter an industry encourages firms to compete more actively…Entry and exit rates help us understand how dynamic an industry is. An industry is dynamic when new firms can enter it and challenge existing ones.” However, this measure has interpretation issues, again raising doubts about whether competition has indeed declined in the Canadian economy.

• Different Base Year Shows Entry and Exit Increased: The report argued that the average entry and exit rates declined between 2001 and 2020. However, this does not necessarily mean competition has declined because varying the base year can change the interpretation of how entries and exits have changed. Indeed, changing the base year from 2001 to 2008 would show that entry and exits increased rather than declined.
• Entries and Exits Did Not Decline in Most Industries: Even with a 2001 base year, the entry and exit rates only declined slightly by 2.8 percentage points for entries and 1 percent for exits. This finding implies that overall rates may have dropped but that most industries may not have been impacted. Accordingly, this is the case as the report found that 169 and 227 industry groups saw no meaningful change or an increase in entry and exit rates, respectively. In comparison, 125 and 70 industries experienced a decline in entry and exits, respectively.
• Not All Industries With Declining Entries and Exits Have Rising Concentration: More importantly, the industries with declines in entry and exits do not always have increases in concentration. The report found that concentration increased for 59 industries while entry rates for 125 industries and exit rates for 70 industries declined. In other words, some industries that had a decline in entries and exit rates also saw declines (more) or no change in concentration (competition). Thus, even if entry and exit rates did decline, it cannot reasonably reveal the true state of competition in the Canadian economy.

Economies of Scale

The Bureau’s report concluded that economies of scale (value added per worker of larger firms divided by that of smaller firms in an industry) declined from 2001 to 2018. Using this measure, the report first argues that competition has declined because the greater efficiency of large firms cannot explain increases in concentration at the industry level. Indeed, the report asserted that “we found no clear correlation between industries with high [scale economies] and those with high concentration…This suggests that the increase in concentration we observed were not due to larger firms becoming more efficient.” However, this finding does not necessarily signal low competition because of a methodological issue with the analysis.

• Correlation Does Not Mean Causation: The report used a correlation model to show that scale efficiencies and concentration have no relationship. However, correlation does not equate to causation, meaning that large firms’ scale efficiencies could result in greater concentration for an industry when a causal model is applied. Thus, the following assertion that the Bureau’s report attempts to disprove continues to be true: “Some concentration in industries with high scale economies may not reflect low competition.” Additionally, the Competition Bureau’s report also used this measure to show that competition has not increased because declining scale economies have not resulted in diminished barriers to entry, as signaled by the low entry rates. As the report asserts, “we expect falling economies of scale to mean declining barrier to entry…However, we did not note rising entry rates.” Yet, this analysis also does not necessarily signal that competition did not increase because of a methodological issue.
• Failing to Account for Foreign Competition and Exit Rates: The analysis only examined entry rates to show that competition is still low while ignoring exit rates and foreign competition. Their logic is that a decline in scale economies should mean more firms would be able to enter now that costs are lowered, generating more competition. But, competition can increase from a decline in scale economies even without an increase in entry when large firms exit the market, especially as they face fierce competition with Chinese and other foreign firms. When this occurs, scale economies will decline, meaning that barriers to entry are lower. In contrast, competition, partly from competing foreign firms, becomes more intense. Yet, domestic entry rates could remain unchanged.

Markups

The Competition Bureau’s report found that markups (the difference between sales price and cost) have risen overall (by 6.7 percent) and for the industries with the highest markups (by 12.5 percent) from 2002 to 2018. As a result, the report implied that competition likely declined because higher markups signal that firms face less pressure to keep profit rates and prices for consumers low. Indeed, the report asserted, “Higher profits and markups can both be indicators of a less competitive economy. In a competitive industry, firms face pressure to keep their prices low. This, in turn, means we would not expect firms to achieve substantially higher profits or markups.” However, competition may not have declined because a series of methodological and interpretation issues with the report’s measure of markups raises doubts about whether markups have indeed increased in the Canadian economy.

• Methodology for Measuring Markups is Flawed: The report’s methodology for measuring markups has a series of problems because it follows an approach by De Loecker and Warzinsky (DLW). For instance, a recent article by Albrecht highlighted that the DLW methodology is flawed because it measures markups using revenue elasticity as a proxy for output elasticity. However, a firm’s revenue elasticity is only equivalent to output elasticity in competitive markets but not when a firm has market power. A study by Bond et al. concluded that revenue and output price data are needed to accurately estimate output elasticity when firms have market power. As such, the results from studies using this methodology have also been criticized as implausible. Disregarding the methodological issues, the markups measure also has a series of interpretation issues, raising further doubts about whether competition has declined.
• Different Base Years Show Markups Have Declined: The report claimed that overall average markups have increased 6.7 percent, while markups in industries with the highest estimated markups increased 12.5 percent from 2002 to 2018. However, upon closer inspection, markups decline if the base year changes from 2002 to 2011, when markups reach their peak. Indeed, markups for the top 10 percent of industries with the highest markups would have declined from over 5 percent to 4.5 percent from 2011 to 2018. Overall markups would have also declined because the average markups for all industries declined or remained about the same.
• Rising Markups is Due to Higher Fixed Costs and Other Factors: Rising markups do not necessarily signal that competition has declined. According to ITIF, rising markups could result from increased fixed costs (such as from intangible capital), higher scale economies, changes in market structure, or changes in other economic factors. The Bureau’s report echoed this assertion, explaining that “Firms may increase prices to recoup…fixed costs, but their marginal costs would remain the same, so we would see higher markups.”

Profits

The Competition Bureau concluded that average profit across industries rose from 15.7 percent to 19.5 percent, while profits for the top 10 percent of industries (those with the highest profits) rose from 29.2 percent to 37.7 percent from 2000 to 2020. As a result, the report suggested that competition has declined because firms face less competitive pressure to keep prices low for consumers. Indeed, the report asserted, “When firms have to compete aggressively against their rivals, they face pressure to keep their prices low. So, we don’t expect them to earn substantially higher profits.” However, competition may not have declined because the report’s measure of profits has methodological and interpretation issues, raising doubts about whether profits have increased.

• Inclusion of Foreign Profits: The report’s profit measure has a methodological issue: it may include foreign profits. Indeed, the report measured return on sales as a proxy for profits (dividing earnings from operations before interest and taxes by revenue) but did not specify whether these figures exclude foreign profits. Given the lack of clarification, the rise in profit rates could be due to rising foreign profits, similar to the United States, where the modest increase in profits in the last two decades is partly from foreign profits. However, as ITIF asserted, only domestic profits can assess changes in domestic competition.
• Different Base Years Show Profits Have Declined: The remaining problems with this measure are interpretation ones. The report claimed that profits have increased from 15.7 percent to 19.5 percent from 2000 to 2020. However, profits appear to be declining when the base year changes from 2000 to any year between 2011 and 2016. Moreover, a longer trend with an earlier base year could also show that Canadian profit rates have trended downward historically. Case in point, an ITIF report found that the United States’s profit rates trended upward with a base year in the 1980s. Yet, when the trend’s period is extended back to the 1960s, they found that domestic nonfinancial profit rates declined from about 9 percent to about 5 percent.
• Not All Industries with Rising Profit Rates Have Rising Concentration: Finally, if competition declined because profit rates increased for 228 industries, then surely concentration should have risen for these industries to signal greater market power. But that’s not the case. In the appendix, the report shows concentration only rose for 59 industries. As such, rising profits cannot reveal much about whether competition has increased or decreased.

CONCLUSION

Contrary to the Competition Bureau’s findings, competition in the Canadian economy does not appear to have declined. The Bureau’s report has limitations for most of their competitive intensity measures that raise doubts about whether competition has increased or decreased in the Canadian economy in the last two decades. Moreover, because the analysis focused on 3- and 4-digit NAICS industries rather than the more detailed 6-digit industries, even if the report’s measures of competitive intensity alone did not have any limitations, the report’s overall finding that competition has declined may still be inaccurate.

As a result, the Competition Bureau and Canadian policymakers should be wary about using this report as the foundation of competition policymaking. More importantly, the report’s limitations mean that it should not be used to justify a more aggressive antitrust regime. Finally, assessing competition in the Canadian competition is still an important task. As such, the Canadian government should update its 2008 data analyzing changes in industry concentration ratios as this better assesses changes in competition.