It is well recognized, and appropriately so, that competition is a key enabler of a thriving private-enterprise economy. It can arise from firms engaging in cost-saving and cost-cutting activities, enabling them to deliver lower prices to consumers. More importantly, it can stem from innovation and entrepreneurship, resulting in new and better products and services that delight customers and save them money. Both big and small companies can drive this second type of competition, known as dynamic competition, in contrast with static competition, which is efficiency-enabled. Static competition does not rely on creativity and innovation and can only dribble out small price reductions. Both types of competition matter, but dynamic competition is the more powerful, more exciting, and more important, as it brings about dramatically different and/or improved products and services that customers enjoy and that nations require for economic growth and national security. It also brings significant productivity improvements while supporting higher wages and social mobility.
Notwithstanding the rather obvious superiority of dynamic over static competition, competition authorities in many countries have favored the static over the dynamic. Some might claim otherwise, as the rhetoric has certainly begun to change over the last several years; dynamic competition is now receiving overdue attention. However, a static-efficiency mindset, a failure to recognize endogeneity between innovation and competition, adherence to a linear view of innovation, and the absence of an organizational capabilities (pipeline) framework (to buttress the understanding of dynamic competition) have nevertheless deflected competition authorities from properly understanding today’s competitive landscape, particularly where digital transformation is in progress.
Unfortunately, many seem to be stuck in a well-traveled and less-relevant debate, now a half century old, as to what form of market structure favors innovation (competition or monopoly), labeling this as the “Schumpeterian” debate or the “Arrow-Schumpeter” debate. It is often forgotten that Joseph Schumpeter seems to have maintained two almost diametrically opposite positions; he is nevertheless remembered mainly for his later views that big firms with some amount of monopoly power are necessary for innovation. Kenneth Arrow hypothesized a positive relationship between competition and innovation while setting aside the appropriability problem (i.e., how to capture value from innovation) by positing a perfect property right in the information underlying a specific production technique. Often, these scenarios are all that many have absorbed from the rich work of Schumpeter, the Austrian School of economics (with its heavy focus on entrepreneurship and innovation), and recent work in competition economics that recognizes disequilibrium in the economic system. This so-called Schumpeterian-Arrow debate casts Schumpeter too narrowly and ought not be of much interest anymore. However, it still seems to color many discussions about competition policy and innovation.
With respect to competition policy and innovation, some commentators, particularly the so-called Neo-Brandeisians, believe that there has been an epic failure with respect to Big Tech. That failure supposedly comes from allowing Big Tech to flourish, and, in the eyes of some, wield monopoly power. With only fragmentary supporting evidence, this new narrative has emerged, often driven by (or at least tacitly accepted by) many competition economists, too many of whom seem quick to advance the view that digital platforms are characterized by inexorable winner-take-all economics, which generate antitrust risks. It is simply assumed that network effects, switching costs, and scale not only complicate but effectively block new entry. The reality is that network effects can often be overcome by superior business acumen and innovative activity—what I call dynamic capabilities. Also, demand heterogeneity leaves considerable room for niche plays that can sometimes explode into major competition with incumbents.
More importantly, in a world of rich technological opportunity and deep uncertainty, market share is a very poor proxy for market power. “Unseen” competition has important disciplinary powers, in some cases more so than known competition from known competitors. This reality needs to be exposed and factored into competition analyses, lest enforcement mistakes be made.
This article does not directly address the questions of whether new legislation is needed and whether it needs to be sector specific. Rather, it sees the opportunity for improving competition policy within existing legal frameworks if economic and business analysis can become more dynamic, “innovation first” in orientation, and grounded in a deep understanding of innovation, something which a well-constructed dynamic competition framework or paradigm can provide.
In this article, I put forward the thesis that monopoly is not a situation of high market share; nor is it simply characterized by high profits or prices above marginal cost. The monopoly of concern should be those circumstances where profits are high, there is an absence of both innovation and dynamic competition, and the focal company is shielded from new entry, i.e., insulated from competition from other innovators. Such a monopolist could stay ahead without innovating or lowering prices and ought to be investigated.
A short-run orientation with respect to theories of harm must also be avoided, as it necessarily squeezes out consideration of innovation. Unwillingness to take a longer-run view quickly morphs into an unwillingness to consider innovation, which often takes longer than the cost-cutting associated with the efficiency paradigm.
The next Part lays out two contrasting paradigms of competition, the static and the dynamic, and claims that the static paradigm has been dominant for far too long. A dynamic competition paradigm is long overdue and may now be partially accepted, albeit in weakened form. Hence the need for additional research and a reaffirmation of basic principles.
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