July 19, 2014
In Canada, the United States and many other open western and eastern economies we fortunately live in free markets. That is to say companies in any sector can enter, devise a new product (or improve on an existing products), compete and reap the free market rewards of doing so – with risk comes reward.
Except, unfortunately, for the fact that national, state/provincial and local governments continually enact legislation, regulations, bylaws and the like setting out who can play, what the requirements are (usually licensing and fee requirements) and penalties for non-compliance.
Needless to say these various state, regional and local regulatory licensing requirements typically impose barriers to entry, raise the costs of competing in a market and keep prices high (or higher) than may be the case absent such “regulation”.
Not surprisingly, regulators of professions ranging from accountants, to engineers, to lawyers to, perhaps more absurdly, hair weavers and other so-called “professions”, commonly attest to the important safety, skill or public interest objectives associated with: imposing standard accreditation and licensing criteria; limiting entry; setting/regulating fees; and/or opposing new entry.
In some cases, this of course makes great sense and is laudable. I’m not sure I want anyone performing open heart surgery on me, providing complex commercial legal advice, signing off on drawings for significant engineering projects, etc. without passing through the full gauntlet of education, peer review, licensing and continuing education.
In contrast, I’m not sure much regulation is required to, say, drive a taxi (sorry taxi drivers around the world duking it out with Uber/Lyft), braid my hair, sell me an electric car or in other markets that are essentially commodity markets or require little expertise or training to provide the service. I’m not saying that all medical, legal, engineering or other traditional professional related services are complex. Clearly they’re not – teeth cleaning or whitening for example; or due diligence in commercial transactions; or the preparation of routine legal documents; or presumably other routine and non-complex steps in many, many other professions. So, in many of these and similar markets, basic services are increasingly unbundled from more complex services (with the level of regulatory oversight and barriers dropping accordingly and appropriately). This is a good thing.
The trouble, however, is that there appears to be a continual stream of local regulators and market participants arguing that their “profession” should somehow be insulated from the normal competitive processes and pressures that the majority of industries and markets are subject to. The taxi market should be subject to entry quotas and fee regulation but not groceries or landscaping. Tooth whiteners and paralegals should be supervised by dentists and lawyers with practice restrictions while many other occupations are subject to no entry restrictions, price-regulation or professional or regulatory supervision. But why? And why are these lines drawn?
Market Power & How It Is Maintained
In this respect, market power tends to be formed and maintained in one of four main ways: through intellectual property law protections (such as patents, trade-marks, etc., though these do not necessarily, of course, guarantee protection from rival brands or market power in all cases); through illegal cartel agreements among competitors (such as price-fixing or market sharing agreements); through certain “unilateral” commercial practices that may, or may not, trigger the competition/antitrust laws, such as exclusive dealing arrangements; and perhaps most useful for incumbents, through national, regional or local regulations that control the number of entrants, terms of product/service supply, scope of practice, etc.
The latter is often colloquially referred to as “regulatory capture”. Nice work if you can get it or can persuade your local regulator to accept that “regulation” equates to restricting competition without the existence of legitimate other interests.
Which is the best for incumbents? Arguably capturing the ear of regulators as, among the various market power enhancing strategies listed above, it is often the toughest to challenge under competition/antitrust laws. This is because in both Canada and the U.S., slightly odd and also rather counterintuitive legal doctrines have developed that can protect competitive restrictions when promulgated by lawmakers. In Canada, the key doctrine is the “regulated conduct defense”; in the United States, the “state action doctrine”.
The question that is increasingly being asked is should that be so? Or in other words, should restrictions on the type and place of practice, number of entrants (quotas), fees or other key elements of competition be permitted to be restricted by regulators when similar restraints would clearly (or likely) be illegal if outside a regulatory framework?
The Canadian Competition Bureau, U.S. Federal Trade Commission (FTC), private sector commentators and academics are increasingly asking this question – i.e., why, if non-legislated cartels (i.e., price-fixing, market division, output restriction agreements, etc. between competitors in unregulated markets) are illegal the same restraints if legislated/regulated should be condoned.
It’s an excellent question and many are increasingly and I think justifiably critical as to why certain sectors and professions should be insulated from competition while others are subject to ordinary competitive pressures.
U.S. FTC Summary of Regulatory Interventions
What am I getting at with this slightly long run-up? Several days ago the U.S. FTC published a very good new summary of Congressional testimony on licensing and competition restraints, highlighting a number of these issues, entitled: FTC Testifies on How Professional Licensing and Regulation Can Affect Competition Before House Committee on Small Business.
The FTC’s rather good note points out some potential consumer protection or safety concerns associated with licensing/accreditation. It also, however, highlights, like many other competition agencies are increasingly doing, the potential anti-competitive effects of regulating occupations, trades and professions. The FTC’s submission also points out the inherent conflict of interest present in some professional self-licensing regimes:
“In the long term … some licensure regulations can cause lasting damage to competition and the competitive process by rendering markets less responsive to consumer demand and by dampening incentives for innovation in products, services, and business models. Occupational regulation can be especially problematic when regulatory authority is delegated to a nominally ‘independent board comprising members of the very occupation it regulates. When the proverbial fox is put in charge of the henhouse, board members’ financial incentives may lead the board to make regulatory choices that favor incumbents at the expense of competition and the public.”
The FTC explains that it tackles local competition restrictions in a similar way as Canada’s Competition Bureau (see e.g.: Competition Bureau – Advocacy), through selective advocacy and public comment and recommendations to loosen local competitive restrictions. Also like Canada’s Competition Bureau, both past (in the era of Sheridan Scott’s “competition lens”) and present with the Bureau’s ongoing advocacy initiative (see: Advocacy), the U.S. FTC “urges federal, state and local policy makers, as well as private and self-regulatory authorities, to consider whether a particular licensure regulation is likely to have a significant and adverse effect on competition, is targeted to address actual risks of harm to consumers, and is tailored to minimize any burden on competition, or whether less restrictive alternatives are available”.
Like the historic and current efforts of Canada’s Competition Bureau and new entrants in current particular industries, the FTC questions the necessity of regulation (or extent of regulation) in a variety of regulated professions, ranging from: auto distribution to taxis to casket sales and real estate brokerage services.
Of course, anyone watching recent regulatory / competition tussles in the areas of food trucks, ride-sharing apps or Tesla’s efforts to sell their cars to consumers will know that both local legislators/regulators and incumbents will fight tooth and nail to protect their regulatory jurisdiction and, in the case of incumbents, their established market share.
So What’s to Be Done to
Reduce Competition Impeding Regulation?
In my humble view, being an advocate of competition, legislators, new entrants, consumers and commentators have a number of tools at their disposal to reduce unnecessary regulatory barriers that may impede competition. These include:
1. Question and comment on proposed legislation that may adversely impede competition.
2. Write, blog and comment on sectors that may have unnecessary and over-reaching anti-competitive restraints.
3. Engage with national, regional and local legislators regarding the importance of reviewing proposed legislation and regulation from a competition perspective.
4. When the Competition Bureau, FTC or other competition/antitrust agencies call for comments on competition advocacy initiatives, speak to your clients / stakeholders and consider filing briefs and comments.
5. If you’re a legislator, regulator or “self-regulator” step back from proposed legislation/regulations/rules and consider whether they (a) may adversely impact competition more than necessary and (b) whether avowed non-competition justifications, such as the safety or the protection of the public, stand up to scrutiny.
6. For “self-regulators” (i.e., associations or other bodies without legislative authority to restrict price, markets or output), it is particularly important to critically assess proposed competitive restraints (and, for example, whether proposed rules or other initiatives may violate criminal or civil competition/antitrust rules).
7. Finally, in Canada, the “regulated conduct defense” (“RCD”) (a partially statutory, partially common law doctrine that can insulate legislated/regulated activities from ordinary competition law challenge) needs to be re-visited to import a competition test as part of its public policy dimension. That is to say that the public policy justification for this defense/exception (it has been variously held to be both by Canadian courts) needs to include a consideration of whether legislation/regulation that may otherwise have valid public policy rationales inordinately impacts competition. This could, of course, be achieved either by Canadian courts as they continue to define the boundaries of the RCD – a number of key aspects remain to be settled – or, perhaps more practically, by legislation that expressly requires that adverse effects on competition be considered in determining whether the RCD applies (and perhaps as well more explicitly considers a balance between competition and other potentially legitimate justifications for limiting competition). Of course, an extension of limits on the application of the RCD could be accompanied by a requirement for Canadian legislators to consider adverse impacts on competition as a pre-requisite to enacting regulations – clearly, however, that is some way in the distance yet.
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