Andy Baziliauskas is an economist specializing in competition policy
This year’s Nobel Prize in Economics went to Philippe Aghion and Peter Howitt, the latter a Canadian, for their work showing that long-run economic growth depends on the churn of innovation – new ideas displacing old ones through creative destruction. Their message is simple but profound – and timely for Canada, in a way you might not expect.
Canada’s productivity growth – the engine of rising living standards – has been weak for decades, leaving us well behind our peers. And the federal government’s substantial new Competition Act reforms do not help.
The reforms aim to increase competition in Canadian markets. One key change is the new structural presumption – that mergers in even moderately concentrated markets are now presumed harmful unless companies can prove otherwise. The intent is better outcomes for consumers, but it amounts to over-enforcement in pursuit of “more competition,” and it risks discouraging the very investment Canada most needs.
The work of Mr. Aghion and Mr. Howitt shows that long-run growth depends on a delicate balance between competition and market power. Tip that balance too far toward enforcement, and you suppress the innovation that drives productivity and living standards.
Canadian Nobel Prize winner Peter Howitt.Pat Howitt/The Associated Press
In the Aghion-Howitt model, the engine of growth is creative destruction: new technologies replace old ones as firms invest in innovation to earn temporary profits. Those profits are what make innovation worthwhile – but only if innovators expect a period of market power before rivals compete away their gains. Too little rivalry and incumbents stagnate. Too much, and firms stop investing. Sustainable growth needs both the incentive to innovate and the fear of being overtaken.
The government’s new structural presumption treats even moderate market concentration as evidence of harm, shifting the burden to firms to prove that a merger will not lessen competition. Even mergers in moderately concentrated industries – sometimes between firms with market shares below 10 per cent – will now be costlier and riskier to pursue.
That directly reduces investment incentives because firms respond to expected returns. When merger policy makes it harder to achieve scale, combine complementary technologies, or capture the returns to innovation before imitators erode them, the expected payoff from investment falls. Projects that previously looked viable no longer make economic sense. The result is less innovation, not stronger rivalry.
From the archives: Canadian Nobel prize winner Howitt on creative destruction in the economy
This danger is magnified in Canada. Our firms already lag in R&D, our intellectual-property protections are relatively weak and many have trouble financing commercialization. For many innovators, acquisition by another firm is the only viable route to market. When these efficiency-driven mergers face a presumption of harm, we make Canadian innovation less valuable and less likely.
Another new item in the government’s reforms, the repeal of the Competition Act’s efficiencies defence, makes the problem worse. That provision allowed mergers whose productivity gains outweighed any price effects. It recognized that some concentration can raise dynamic efficiency by pooling R&D, eliminating duplication or achieving scale. Without it, enforcement tilts toward simply keeping prices down. Mergers that could lower costs or accelerate innovation may now be blocked if they increase the market share by a small amount.
Canada’s productivity crisis won’t be solved by treating market concentration itself as a problem. If we want more innovation, we need a framework that lets entrepreneurs both compete and capture the rewards of success. That means strengthening intellectual property, improving access to growth capital and designing competition law that encourages risk-taking, not just unconcentrated markets. It also means smarter regulation and policy. The Competition Bureau has done impressive work encouraging smarter regulation through its whole-of-government advocacy for more open, competitive markets.
But while pro-competitive advocacy is crucial, competition law enforcement is another matter. The Aghion–Howitt insight is that growth is endogenous – it depends on incentives. Competition law enforcement that prioritizes short-term price control over long-term innovation may win cases, but it will lose the growth race. The bureau and Competition Tribunal did not over-enforce “innovation mergers” under the previous law, and they would do well to remember the risks of overly aggressive enforcement under the new law.