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BUSINESS | FEBRUARY 23, 1998 VOL. 151 NO. 7 |
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Bigger Can Be Better Canada's regulators find a lot to worry about in mergers. They shouldn't By TERENCE CORCORAN
No economy ever functioned according to the Perfect Competition model--the first form of P.C.--and none ever will. But the fiction still permeates Canadian economic understanding, not to mention public policy and corporate law. Deeply entrenched P.C. theory makes it doubly difficult to fathom the corporate mergers and takeovers that have become the daily drumbeat of business news. Hudson's Bay plans to take over K Mart Canada and merge it with Zellers, eliminating a competitor in discount retailing. Canadian National Railway is buying Illinois Central, creating a North American transport giant. Nova and TransCanada PipeLines are combining to create the continent's fourth largest energy-services company. The value of merger announcements involving Canadian firms so far this year is easily in excess of $41.7 billion, and 1998 will go down as another year of accelerating concentration. Overshadowing all the deals so far, of course, is the proposed $27.8 billion merger of the Royal Bank of Canada and the Bank of Montreal. If any union is going to bring out the Perfect Competition police, it's this one. Indeed, Ottawa's Competition Bureau has already announced plans to take its Royal-BOM merger probe into every community that has enough intersecting streets to theoretically support perfectly competing bank branches or services. Market shares will be calculated, concentration thresholds analyzed, monopoly tests dissected. The bureau will also carve out every product line and examine the postmerger environment to ensure that it doesn't unduly lessen competition. By definition, says the bureau, mergers between competing banks reduce competition. Stop right there. If there are common elements running through recent merger news, including the bank deal, they are that the corporations are up to their elbows in competition and that mergers are dramatic demonstrations of competitive behavior. This is far from a revelation. Joseph Schumpeter, in his classic 1942 book, Capitalism, Socialism and Democracy, ripped apart the idea of perfect competition and coined a useful alternative phrase: creative destruction. Schumpeter intended to identify the core dynamism of the market economy. In a competitive economy, the bustle of mergers, takeovers, failures and entrepreneurial rivalry is part of a process of change and discovery. Even more radical competitive models were developed by other economists, mostly of the laissez-faire school. In their view, corporate size, the number of players and market share are not the determinants of a competitive market. Even an apparent monopoly structure generates competitive forces, assuming the market is open and not protected by some government decree. We need a better phrase to capture this reality. So I propose one: natural competition. What we have in Canada right now is a (mostly) naturally competitive market; public policy should make sure it stays as natural as possible. That means removing restrictions on ownership and letting the competitive-merger process operate. For example, federal law prohibits any single shareholder from owning more than 10% of Canadian National. This means CN can buy a U.S. railway, but a closely held American firm can't buy CN. Canada's airlines, telecommunications firms, bookstores, banks and others are shielded by ownership rules and various restrictions. Foreign banks run a regulatory gauntlet to set up business in Canada. All this skews the natural market away from competition. Mergers in a natural market--of banks, discount stores, railways, pipelines or whatever--actually increase competition. The owners and managers of firms are behaving exactly as competitors should, identifying trends, understanding their markets and making entrepreneurial decisions in the quest for efficiency and profits. When the Bay connects Zellers with K Mart, competition in Canadian retailing will intensify. CN Rail's takeover of Illinois Central captures an opportunity to streamline rail transport across the continent. So too with the big bank merger and all the other deals that will continue to dominate Canadian business--provided that everyone gets out of the way and lets in the real competition. Terence Corcoran is a columnist with the Globe and Mail's Report on Business.
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ne of the more artful economic myths of our age is the concept
of perfect competition. You know the model: four bank branches
at every intersection, five department stores in every mall,
rows of airlines at the airport and scores of small companies in
every line of business from shoemaking to auto production.
Nobody has the power to raise prices or dominate the market; the
price of everything is as low as it can go.