Competition Intensity in Canada: A Critique of Recent OECD Findings

Abstract

In a series of recent publications, the Organisation for Economic Co-operation and Development (OECD) used the Hirschman-Herfindahl Index (HHI), in conjunction with other indicators of market power (import penetration rates and relative mark-ups) often used in the economics literature, to evaluate the market structure of industries and examine the intensity of competition in several countries, including Canada. In this paper, we find that the OECD substantially overestimated the intensity of competition in Canadian industries by systematically underestimating Canada’s HHI by more than 450 times in some industries. Contrary to the OECD findings, we show that the average HHI of Canadian industries was 115% higher than for U.S. industries rather than 40% lower. For reasons outlined in the paper - computation errors, systematic bias of the OECD’s HHI indicator, and the use of establishment-level data - the international comparisons of HHI performed by the OECD should be dismissed and their conclusions regarding the intensity of competition in Canadian industries should be considered with great caution.