Neutrality cleanup, Aisle 3

When is an industry competitive and when is it an oligopoly that destroys competition and needs to be controlled? These days it’s a question that produces contradictory answers.

In telecom, a perpetual warzone of competition theory, the net-neutrality battle looms as an illustration. The U.S. Federal Communications Commission announced Tuesday it plans to allow cable and wireless firms greater control over content, thus increasing competition among carriers and undermining the net-neutrality theory that such carriers should be forced to treat all content more or less equally.

In some ways, this is a battle between two opposing factions that wield what some consider extreme market power. On one side are the Google, Facebook and Amazon monoliths of the web, opposing the FCC move that favours AT&T, Verizon and other monoliths of telecom.

In an added complication, the U.S. Justice Department is trying to block AT&T’s takeover of Time Warner because it would give the telecom giant too much power over content. The competition theory is that AT&T could prevent competitors such a Verizon from getting access to, say, HBO, which is a Time Warner service. That seems like a nutty thing for AT&T to do, since harming HBO’s ability to sell its service to non-AT&T internet providers could slash HBO’s audience and undermine AT&T’s investment in Time Warner.

Although, in a competitive market, even if AT&T were to determine that curbing the availability of Time Warner products was a good business strategy, then that would be a form of competition. Or would it?

Don’t look to competition law and accompanying economic theory for answers. Neither the law nor theory are precision machines filled with clear concepts and hard logic. They wander all over the economic map of corporate behaviour and provide no real guidance as to when competition exists or when it doesn’t.

Do we have too little Internet and telecom competition? Or too much? It’s an economic question that is somewhat comparable to the muddle that emerged this week in the Canadian grocery industry.

As readers of business news and comment know, the state of Canadian grocery retailing can be summed up in two categorical sentences: 1. The industry is a near oligopoly in which a few large firms hold market power over $82 billion in revenue, manipulating the bread market and deploying a variety of anti-competitive schemes to bully suppliers and squeeze consumers. 2. The industry is a hothouse of competition, with big Canadian and U.S. brands battling for market share in the face of low profit margins, shifting consumer habits and the segment-killing arrival of Amazon and online food shopping.

No wonder Canada’s Competition Bureau, after three years of dissecting the entrails of Loblaw Companies’ operating methods in search of anti-competitive behaviour, this week threw its hands in the air and walked away from its milliondollar investment in an anti-competition investigation that has led nowhere.

In an unusual outline of its reasons for abandoning the Loblaw case, the bureau issued a “policy statement” that concluded that there is “insufficient evidence” to conclude that Loblaw “lessened or prevented competition substantially in any relevant market.” Note: In any relevant market.

The bureau’s summary, it must be said, outlines some practices — called “Loblaw Policies” — that to an outside observer certainly appear to lean toward the aggressive. The policies were applied to wholesale suppliers who sell products to Loblaw’s various supermarket chains. In one practice described by the bureau, if Loblaw sold 20,000 units of a product after reducing its retail price from $2 to $1.50 to match the advertised price of another retailer, Loblaw could decide to deduct $10,000 from the supplier’s bill — the value of the 50-cent price difference on the 20,000 units sold.

As the bureau puts it, the line between hard bargaining and anti-competitive conduct is hard to draw. It concludes that behaviour is anti-competitive if there is “intent” to harm the competitive position of another firm. Yet it’s good for competition if the behaviour is just part of hardball but authentic competitive practice within the grocery retailing industry.

Loblaw revised its purchasing and pricing policies in 2016, but the bureau’s “position statement” on the case highlights the difficulty in determining what constitutes excess market power on the buying side of a market. Grocery chains, as part of the competitive process, are expected to bargain with large and small suppliers of everything from soup to nuts.

The Competition Bureau’s decision to abandon the Loblaw investigation should serve as a lesson for advocates of net neutrality and a useful framework for telecom/internet policymakers.

Some Loblaw suppliers seem to think that they have a right of access to Loblaw’s store shelves, just as some internet and content suppliers such as Netflix seem to think they have a right to access telecom connections. The bureau’s statement upholds the principle that there is no neutrality in grocery retailing, nor should there be.

If we apply the bureau’s decision to telecom, the conclusion seems clear. Just as supermarket chains are not obliged to stock and sell all groceries, and are free to engage in competitive buying practices, neither should telecom companies be obliged to distribute all web and media content.

THE LOBLAW INVESTIGATION SHOULD SERVE AS A LESSON FOR ADVOCATES OF NET NEUTRALITY.