As Big Firms Get Bigger, Managing the Economy Gets More Difficult

Rise in mergers & acquisitions and impacts on competition demand heightened scrutiny
By Rahul Vaidyanath
Rahul Vaidyanath
Rahul Vaidyanath
Journalist
Rahul Vaidyanath is a journalist with The Epoch Times in Canada. His areas of expertise include the economy, financial markets, China, and national defence and security. He has worked for the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York, and Los Angeles.
August 11, 2021 Updated: August 11, 2021

News Analysis

Big companies have strengthened their dominance in the economy relative to small businesses amid the pandemic and a rise in mergers and acquisitions (M&A) is afoot. These developments pose additional obstacles for federal agencies such as the Bank of Canada and Competition Bureau of Canada as they try to fulfill their mandates.

Bigger companies tend to have greater pricing power, earn larger profits, and are less sensitive to external financing conditions. They can also engage in anti-competitive behaviour.

“Ever larger and more powerful companies are making monetary policy a less potent tool for managing the economy in advanced economies,” the International Monetary Fund (IMF) said in a July 21 blog post. 

The IMF added that smaller firms, which typically face more difficulty obtaining financing and have slimmer profit margins, are much more sensitive to the central bank’s interest rate adjustments than bigger companies are.

As pockets of inflation percolate in the economy, more questions are arising as to when the Bank of Canada will start raising rates and stop buying bonds to support financial markets and lower longer-term interest rates.

But a potential problem, the IMF said, is that greater market power—the ability to mark up prices above competitive levels—implies that central banks may need to raise rates more aggressively than would otherwise be the case in a more competitive economy. And lower-markup firms and more competitive industries would get hit disproportionately, putting the economic recovery at risk.

This is not a new problem for central banks, but one that has been exacerbated by the pandemic in which the tech titans in particular have flourished. 

Former Bank of Canada senior deputy governor Carolyn Wilkins said previously that market power should be kept in check, especially regarding the tech giants and their monopolistic behaviour. 

“Phone companies are traditional examples, and social media companies and online marketplaces are more-modern examples,” Wilkins said at a G7 symposium in 2018.

“What is new is that the ‘winner-takes-all’ effect is magnified in the digital economy because user data have become another source of monopoly power,” she said.

“The degree of income inequality affects the transmission of monetary policy,” Wilkins said in a 2019 presentation at the G7. Like big companies, wealthy and less indebted individuals are not as sensitive to changes in their borrowing costs as compared to smaller companies and highly indebted households.

Both the IMF and Wilkins said that excessive market power could be a drag on growth, innovation, and business investment.

“The big tech firms are a case in point: The market disruptors that displaced incumbents two decades ago have become increasingly dominant players that do not face the same competitive pressures from today’s would-be disruptors,” the IMF said in a March 15 blog post.

The IMF sees a trend toward falling business dynamism amid the tenuous recovery from the pandemic.

“While M&A can yield cost savings and better products, it can also weaken incentives for innovation and strengthen a firm’s ability to charge higher prices,” the IMF said.

Both the BoC and the IMF have advocated for tighter control over M&A and modernizing antitrust frameworks and competition policy. 

The objective is to increase competition in advanced economies and to try and level the playing field for small business.

Competition Watchdog Busy

PwC Canada expects a busy year for M&A in 2021 after a subpar year in 2020. For smaller companies in distress, the prospect of getting bought out can become increasingly likely.

The Competition Bureau of Canada told The Epoch Times that in fiscal year 2020–21, M&A activity was down and the number of reviews it undertook were “significantly lower than in previous years.” But in the first four months of fiscal year 2021–22 alone, it concluded 76 merger reviews, already surpassing the 72 merger reviews conducted in the first six months of fiscal year 2020–21.

For example, the bureau is currently investigating the proposed $26 billion acquisition by Rogers of Shaw, and it is also in an ongoing investigation of Amazon, launched in 2020, to determine if its amazon.ca website is diminishing competition in Canada.

“The law [Competition Act] prohibits a company from using its position in a way that hurts competition in the marketplace,” Jayme Albert, senior communications advisor for the Competition Bureau, told The Epoch Times. “Where market power is attained through other means, such as anti-competitive practices, agreements, or mergers, the Bureau can and will investigate.”

One potential consequence of M&A is the acquiring company increasing markups, Wilkins said in her 2019 presentation.

Recent IMF research has shown that global price markups have gone up by over 30 percent on average in advanced economies since 1980, and twice as fast in the digital sectors.

“Policy-makers should act now to prevent a further, sharp rise in market power that could hold back the recovery,” the IMF said.

The IMF said competition authorities may need to make investments to further boost sector-specific expertise amid rapid technological change.

“COVID-19 has made it difficult to shop small,” said the Canadian Federation of Independent Business in a June 28 statement about a public opinion poll showing that 60 percent of consumers say they’ve been spending less at small businesses during the pandemic and more at big box stores and online giants.

Rahul Vaidyanath
Rahul Vaidyanath
Journalist
Rahul Vaidyanath is a journalist with The Epoch Times in Canada. His areas of expertise include the economy, financial markets, China, and national defence and security. He has worked for the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York, and Los Angeles.