Transcript: Vass Bednar and Denise Hearn

My interview with the authors of The Big Fix

If you’re living in Canada and you have a cell phone plan, or a bank account, or have taken a flight recently, or struggle to afford groceries, you already know how expensive and dysfunctional the country has gotten for consumers. My guests on the podcast this week have written a book about the rise of corporate monopolies (and duopolies and oligopolies) — and, as they write, this market concentration “goes well beyond the usual suspects.”

Vass Bednar is the executive director of McMaster University’s Master of Public Policy in Digital Society program, a contributing columnist to The Globe and Mail, and the host of its podcast Lately. Denise Hearn is a resident senior fellow at the Columbia Center on Sustainable Investment at Columbia University. Their new book, for the McGill Max Bell Lectures, is The Big Fix: How Companies Capture Markets and Harm Canadians.

This is an edited transcript for paid subscribers. You can listen to the interview for free here.

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TH: One of the aims of this podcast is to understand what's gone wrong in our country, how it has become so prohibitively expensive and dysfunctional. I think this book contributes so much to that conversation. I want to start by reading a quote: “Industry concentration is everywhere. We have three major telecommunications companies, five grocers, a few big banks, two major airlines and one train company.” I think Canadians understand that we have monopolies (or duopolies, or oligopolies) when it comes to banking and telecommunications and airlines, but I had no idea how common this was to other industries, from movie theatres to vets. How did we get here?

DH: It really is a pervasive problem, and I think you're exactly right to say most Canadians know about the banks and the telecommunications and airlines. As we were doing our research, we found that it really was pervasive across so many industries: software, fertilizer, and so on and so forth. We got here because concentration happens through waves of mergers and acquisitions that go unchallenged — companies gobbling each other up and basically facing no barriers to doing that. But we do have laws that are meant to prevent concentration that is anti-competitive. 

But in Canada, our Competition Bureau, which is the regulator that's responsible for reviewing mergers, has never successfully blocked a merger. We have blocked mergers through the Ministry of Finance. Some other ministries actually have the ability to block mergers, but there is really only a handful of examples in Canada where we have successfully blocked mergers. And so, we think that that's a major contributor to why industries have gotten so concentrated in the last couple of decades.

TH: For our listeners outside of Canada: We have a productivity problem in Canada. 

VB: So I've heard. 

TH: How does [corporate concentration] impact Canadian productivity?

VB: We really debated how much we could add to this conversation. I think typically we see some dotted lines across competition and productivity. For a long time, Canada has wondered, in this very polite and sweet way, why is it that our firms historically underinvest in research and development? Why is it that we don't seem motivated to adopt productivity-enhancing technology, some of which we're making in Canada. And why do we under-invest in our workers? They draw a tacit line to they are simply not motivated enough to do so. You have also seen the Bank of Canada gesture at market behaviours and market power, but of course it's outside of their mandate. So, part of how we got here, and part of how we move forward, is about taking a more integrative, transversal approach. And recognizing those interactions and connections where possible.

TH: I want to focus a moment on groceries in particular, which have been a big challenge for so many Canadians to afford in recent years. We've seen a big backlash from the public on this. I know you covered this on The Global and Mail’s Lately podcast, the two of you. There has been a general perception in the public that Big Grocery in this country was profiteering during the pandemic. I think a lot of people were upset, myself included, to see Loblaw walk back their $2 an hour pandemic pay for employees. I was at CBC when this was going on. I remember interviewing a grocery store worker who had risked his own health for months to serve the community. He told me that that extra $2 an hour meant he was able to start saving for the first time. Now, not only did that pandemic pay evaporate, but food prices got very high. Loblaw tweeted at one point that food prices were simply a result of supply chain issues. Denise, does that statement hold up to scrutiny?

DH: We believe it doesn't, for a number of reasons. The thing also, importantly, about the hero pay was that it only lasted, I think, for two or three months. It wasn't very long-lived. All of the grocers ended it basically around the same time. So, there were allegations of essentially wage-fixing, or collusion on setting wages. Then, on the inflation side, yeah, grocery is typically a low-margin business. I always like to say it is miraculous that we can walk into a store and have the variety of products that we have. This just-in-time delivery, all this stuff, is pretty spectacular. 

At the same time, the grocery store is saying, “It's just supply chain issues.” Once the macro data started coming in, we saw that — actually not only in grocery but for all — corporate profit margins were at record highs during the pandemic. You know that if margins are high, that means that companies were raising their prices over and above their operating costs. What we saw was actually that companies were able to use the narrative cover of inflation to basically expand and raise prices more so than they were able to in the past. And that even as central banks tried to curb inflation and raise interest rates, that as inflation was coming down, the prices weren't necessarily following, and that companies were able to hold on to those profit margins. So, we do think that it's much more than just supply chain issues that were at play there.

VB: If I can do a nerdy chase, there is some speculation — not to bring my own personal conspiracy theories forward, because they didn't make it in the book — but some have speculated that the Competition Bureau might soon redo their recent grocery market study, because in the interim they got some new powers. Whenever I say that, I feel like I'm talking about an Avengers movie, like “they got some superpower,” but they kind of did. They got something called market study powers, which means when they are conducting an investigation, they can compel information from businesses. You might be charmed to know that in the past, our Canadian way was to simply ask very nicely for the information that we needed. So, part of “how did we get here?” was some almost inherent blindness, in terms of the Competition Bureau. I think the cliche is something like “fighting with one hand behind your back,” or something like that. But it's kind of what we were doing.

TH: For listeners outside of the country, consumer trust is already very low. This is in part due to a bread price fixing scandal that went on for years. You write in the book that “if a household purchased one loaf of bread per week for 15 years, that would total $1,170 taken directly from each Canadian's pocket.” For people who are not familiar, Vass, can you give us the broad strokes of that scandal?

VB: Basically it was brought forward that there wasn't tacit but overt collusion amongst the major grocers to keep the price of bread artificially elevated. So the forces of competition that we count on to discipline the market, and have some pricing variability, were not really there. Loblaw, because they voluntarily complied with this investigation, was able to sort of — I don't want to say a cliche like “get off scot free,” because there was a modest penalty associated with this — but they ended up giving people gift cards. I think it's not just the dollar amount. Of course, taking advantage of families in that way is absolutely hideous. I think it's that erosion, as you said, of trust — something that people can't take out of their minds. By the way, every time I go to buy groceries, I'm like, “I swear I just did this.” It is a part of our everyday lives. It's part of the cadence of being alive. It should be something that is joyful and pleasurable and moderately interesting. But when your guard is up and when you don't really trust the prices that you're seeing, or the size of the bag of chips that you really need so you can kick back with your favourite TV show, it just causes a lot of discomfort. We wanted to make sure we were acknowledging that, because we were seeing it come up in a lot of different places.

DH: I would just add to that: I think what Vass is saying is something we also wanted to talk about in the book, which is that once you get concentrated market power, once you have monopolists or oligopolists, their strategies don't change over centuries. They hike prices, they squeeze workers and so on. But their tactics can change. What we're seeing is constant evolution of different types of tactics, particularly on the pricing side. Where, as Vass alluded to, they are doing shrinkflation, where you get a bag of chips and actually there is a third fewer chips than there were last year or whatever, in the bag, but it's the same price. That's one tactic. We found that Walmart had been artificially overweighting groceries at the self-checkout to inflate the prices. There's the actual price fixing. And now, we have algorithmic, dynamic pricing, outside of groceries, in everything from ticket sales to whether it's concerts or airlines or whatever. And personalized pricing because of all the data that companies have on us. These tactics are constantly evolving. So, that's really hard for regulators to constantly be policing. It's also hard, it's nearly impossible, for consumers to police it. But that's why you need strong, bright line rules against these types of tactics. Hopefully that makes it so that markets aren't so seemingly … so, it is not like you're constantly going up against a monopolist every time you go to buy something and wondering whether you're getting screwed or taken advantage of. Where there's a level of transparency and there's a level of, at the end of the day, hopefully fairness about how we engage with each other in the marketplace.

TH: Speaking of tactics, there were two others that I wanted to touch on. One was this false competition of umbrella organizations buying up all these different brands. So it looks like you have choice in the store, but you don't necessarily. The other was that, as you write in the book, “more and more companies are moving from competing within industries to competing to accumulate vast ecosystems of assets.” So, Loblaw is not just in food, they are an “everything business,” a trend that we're now seeing. Can you walk us through what that looks like — and the challenges that poses for competition policy?

VB: Maybe I'll take the first part and toss it to Denise for the second one. We categorize both under this concept that we borrowed from one of our many interests, pro wrestling, which is kayfabe — which I temporarily tried to convince Denise to pronounce kay-fab-EY to make it sound fancier. But that's not the correct pronunciation of the word. At the grocery store, you do have quite a bit of choice, but it's an illusion. So, we wanted to bring forward that illusion of rivalry. You might see lots of different soup cans, but they are really actually only owned by two or three companies. Part of that is a structural, kind of fascinating element that we typically talk about with digital companies, who own and operate in a marketplace. When Amazon can self-preference their own products, companies that they own, in search or use pricing strategies, et cetera. 

We wanted to say, “Hey, these Big Tech things, these fancier interventions that seem newer or more novel are actually happening in our backyard and we are experiencing them, but you don't really notice — and we need to talk about that.” Then, that second element, yeah, the ecosystem. You are mentioning everything companies. Is Loblaw just a grocer? Is a telecom just a telecom? We don't really think so. Because a foundation of competition law is that assessment of a relevant marketplace. Who are the direct competitors? What is the playing space? What is the wrestling ring that you're in? It starts to fall apart when companies have these incredible advantages, and it becomes almost impossible to directly compete with them head-on.

DH: My favourite story that I tell is when I went to London, where I used to live. I went to this old market that I used to love, and there was a new tenant in the market and it shocked me. It was an Amazon store, but it wasn't an Amazon Go grocery store. It was an Amazon hair salon. I was like, “What in the world is Amazon doing opening a hair salon?” They were undercutting the independent hair salons around them by 10 or 15 pounds for the same services, and you had to sign in with your Amazon account. It's a small example, but it's an example of how companies increasingly leverage their free cash flow, their high profits, to invade every possible industry imaginable and try to force out the competition. Amazon is the quintessential everything company. It's in e-commerce, obviously, and grocery, home devices, logistics, cloud computing. The list goes on and on and on. 

But increasingly, more and more companies, like Vass said, are emulating that strategy — once they've reached a certain level of market penetration in one industry … So with the telecoms, that's a great example, where we've had an oligopoly for many years. They don't really want to compete to steal market share from one another anymore because they're in a good position. So, now they have to find new ways of growing and that's why they will expand into ever-increasing new industries. That's not necessarily a bad thing. But I think it does raise this issue of if you're a startup and you want to compete, how do you compete with an everything company that has that level of excess cash? It has that many coordinating assets and talent, and everything else. And even the ability to comply with regulation; I mean, that's a big one too. Regulation sometimes can strengthen incumbents because it's harder for smaller firms to compete. So yeah, so that's one of the ways that we think it makes it more challenging for competition regulators to get their hands around how companies are shifting and changing.

TH: It's so interesting. I think your diagnosis is convincing. I want to turn now to the prescription — the second part of the book. You highlight a paradigm shift towards pre-distribution. Can you walk us through what that is, and how that would work?

DH: I've been the advisory board chair of an organization called the Predistribution Initiative, which is where I first encountered this word. But the idea is that when we talk about policies to rebalance power in the economy or rebalance wealth in the economy, we tend to think of taxes, we think of redistribution. We'll let markets do their thing, and then we'll tax, and then we'll redistribute. Predistributive policies say, “Are there ways that you could share those economic gains more widely from the beginning, by design?” Not in a way that is state command and control, or something. But basically, “Can you structure markets in such a way, or at least provide guardrails, that allow these gains to be predistributed?” We think that competition policy is a great example of this.

Vass and I like to say that all markets have rules, and those rules can be set democratically through our public policy channels or they can be set by private interests. Now we have de facto private regulators. We have the biggest companies setting market rules in their favour all the time. What we want to do is have a policy ecosystem that sets market rules such that every entrepreneur can bring their best idea to the market. Every worker can bring themselves and not have to fight constantly for a higher wage against a monopolist. Every consumer, as we said earlier, is engaging in good faith in marketplaces that aren't taking needless advantage of them. That's what we mean by predistributive policy and competition policy being one of those tools.

TH: It's interesting, I just encountered that word recently. The American scholar Musa al-Gharbi was on my podcast and he was talking about this particular point being a real sticking point between the elites in America and everyone else — that everyone else prefers pre-distribution, whereas elites tend to default to redistribution.

DH: Oh, that's fascinating.

TH: I found it so interesting too. So, you favour a whole government approach, meaning, as I take it, that all ministries would tackle this problem in their own purview as opposed to say just the Competition Bureau being in charge. This makes a lot of sense to me. I do wonder if Ottawa is capable of something that ambitious. The civil service has ballooned. There has been an over-reliance on consultants, especially McKinsey. We have seen scandal after scandal, like the spending on the ArriveCan app that call into question the integrity of our bureaucrats. Is there the political capacity, and will, to disrupt the status quo here?