Canada Competition Bureau Investigating AI Impact

On March 20, 2024, the Canadian Competition Bureau (“Bureau”) launched a significant initiative to understand the impacts of artificial intelligence (“AI”) on competition in Canada. The Bureau has published a discussion paper titled “Artificial Intelligence and Competition” and is inviting public feedback to explore how AI influences competition. The aim is to better prepare for addressing potential competitive challenges and to promote healthy competition in AI markets. The public can submit their comments until May 4, 2024.

Key Highlights

AI is transforming numerous sectors of the economy, with widespread adoption by Canadian businesses and consumers. Recognizing the need to understand and address the implications of AI, the Bureau released the Discussion Paper to foster an informed national dialogue. This initiative will help deepen the Bureau’s understanding of AI’s competitive dynamics and guide its enforcement and promotional efforts in AI markets.

The Discussion Paper provides a comprehensive definition of AI and outlines the various technologies that constitute AI (Section 1). It also describes the markets involved in creating AI products or services, including AI infrastructure, development, and deployment markets (Section 2).

The paper then examines how AI impacts competition, focusing on areas such as mergers and monopolistic practices, cartels, and deceptive marketing practices (Section 3).

Promoting Fair Competition in AI Markets

The Bureau’s mandate includes investigating and addressing market power abuses and mergers that could hinder competition. Key issues identified in the Discussion Paper include:

Barriers to Entry

Participation in AI development markets requires access to data and “compute inputs” (e.g., AI chips and cloud services). The Bureau highlights that difficulties in accessing these inputs could be a barrier for new firms, especially if proprietary data becomes essential. For instance, if a startup aims to develop an AI-driven health diagnostics tool, it may struggle to access large datasets necessary for training its models, which are often controlled by established tech giants.

Large technology firms’ access to substantial proprietary data may give them a competitive edge. Companies like Google and Facebook have amassed vast amounts of data through their various platforms, which they can leverage to enhance their AI capabilities. This access can create a significant barrier for new entrants who do not have similar data resources.

Additionally, new entrants may face challenges such as high upfront costs and a shortage of AI-specific hardware. For example, the cost of high-performance GPUs needed for training complex AI models can be prohibitive for small companies. Moreover, the current global shortage of GPUs exacerbates this issue, making it even harder for new players to enter the market.

Economies of Scope and Scale

Large technology firms may have a competitive advantage due to their substantial in-house resources, making it difficult for new participants to enter the market or compete effectively. For example, a company like Amazon can leverage its extensive cloud infrastructure, expertise, and financial resources to develop and deploy AI solutions at a scale that smaller competitors cannot match. This ability to achieve economies of scale and scope allows larger firms to spread their costs over a wider range of products and services, thereby reducing per-unit costs and increasing market competitiveness.

Predatory, Exclusionary, and Discriminatory Conduct

The Bureau is concerned about the potential use of AI for predatory, exclusionary, or discriminatory practices. For instance, AI could identify “at-risk” customers for targeted below-cost price cuts to drive competitors out of the market. Imagine a scenario where a ride-sharing company uses AI to pinpoint users who frequently switch between services and offers them significant discounts to lock them into their platform, effectively squeezing out competitors.

AI could also be used to prevent other firms from operating in the market. For example, a vertically integrated firm that supplies AI infrastructure (like cloud services) might restrict access to essential tools for competing companies in the downstream market. This exclusionary conduct could stifle innovation and reduce market diversity.

Proper human oversight is necessary to mitigate these risks. Companies should implement transparent AI governance frameworks to ensure ethical use and prevent practices that could harm competition.

Merger Considerations

The Bureau suggests that mergers in AI markets, especially those involving suppliers of compute inputs, should receive additional scrutiny. For instance, if a leading cloud service provider acquires a startup with cutting-edge AI technology, this could potentially reduce competition by consolidating market power. The Bureau emphasizes the need to assess such mergers carefully to ensure they do not lead to monopolistic practices or hinder innovation by absorbing emerging competitors.

Addressing Cartel Risks and Deceptive Marketing

Cartels

The Bureau is wary of AI being used to facilitate cartel behavior. AI could automate price implementation, communicate with cartel members, or increase market transparency, potentially leading to tacit algorithmic collusion. For example, if several competing airlines use the same AI-driven pricing algorithms, there is a risk that these systems might autonomously adjust prices in a way that mirrors collusion, even without explicit agreements between the companies.

Deceptive Marketing Practices

The Bureau emphasizes the importance of truthful information for consumers and highlights the risk of AI being used for deceptive marketing. AI could automate and scale deceptive practices, such as fake reviews and deepfake content. For instance, generative AI could create realistic but fake customer testimonials or product reviews, misleading consumers into making purchasing decisions based on false information. Additionally, deepfake technology could be used to produce convincing but fraudulent promotional videos, further complicating the landscape of digital marketing.

Invitation for Feedback and Support

The Bureau is seeking feedback on these issues and additional technologies that should be considered. It aims to enhance its understanding of AI markets in Canada and identify other factors affecting competition in the AI sector.