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Antitrust Issues in Schumpeterian Industries
Abstract
The relationship between the quality of political institutions and the performance of regulation has recently assumed greater prominence in the policy debate on the effectiveness of infrastructure industry reforms. Taking the view that political accountability is a key factor linking political and regulatory structures and processes, this article empirically investigates its impact on the performance of regulation in telecommunications in time-series--cross-sectional data sets for 29 developing countries and 23 developed countries during 1985--99. In addition to confirming some well-documented results on the positive role of regulatory governance in infrastructure industries, the article provides empirical evidence on the impact of the quality of political institutions and their modes of functioning on regulatory performance. The analysis finds that the impact of political accountability on the performance of regulation is stronger in developing countries. An important policy implication is that future reforms in these countries should give due attention to the development of politically accountable systems. Copyright The Author 2009. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.
... However, critics have argued that the benefits and durability of strong network effects have been overemphasized (e.g., Liebowitz, 2002;Liebowitz and Margolis, 1990;Schmalensee, 2000). The selfreinforcing relationship between an installed base and customer benefits is an important assumption that leads to the winner-take-all outcome in Arthur's (1989) theoretical work. ...
... For example, recent empirical work on the home video game industry by Shankar and Bayus (2003) does not support Arthur's argument. Invoking the notion of creative destruction (Schumpeter, 1950), some critics have argued that innovative entrants can wipe out incumbency advantage based on network effects (e.g., Farrell and Klemperer, 2007;Liebowitz, 2002;Schmalensee, 2000). ...
... Schumpeter (1950: 84) conceptualized the notion of "creative destruction," which represents the possibility that entrants with innovation undermine the foundations of incumbents' very survival. Invoking this notion, some critics have recently argued that innovative entrants can match or sometimes sweep away incumbency advantage based on network effects (e.g., Farrell and Klemperer, 2007;Liebowitz, 2002;Liebowitz and Margolis, 2001;Schmalensee, 2000). As mentioned previously, AOL's dominant position in the IM market was at the heart of an antitrust policy debate at the turn of the new millennium, but the firm's incumbency advantage based on its installed base was not subsequently amplified. ...
The literature on network effects has implicitly assumed that an increase in the size of the installed base magnifies network effects, which is a source of incumbency advantage. We argue that the overemphasis on this relationship has resulted in controversy and confusion in the literature, where the role of social networks remains largely unaddressed. By developing computational models of network effects with various network structures, we show that social distance in a customer network plays a moderating role that strengthens or weakens the relationship between the installed base and network effects, which in turn, affects the durability of incumbency advantage. When the average social distance between members in a customer network is large, the incumbency advantage will not be amplified, and an entrant with an incompatible product or service may find ways into the market. On the other hand, when the average social distance is small, early entry with a growing installed base will magnify incumbency advantage.
... In stable markets, technological uncertainty or discontinuity is less likely to exist, and thus the gateway to entry for later movers depends more on their intractable resource endowments and know-how than on luck or opportunity. In addition, the ability of early mover firms to establish technological leadership is greater in stable than in dynamic markets (Schmalensee, 2000). ...
... In more dynamic markets, the value of moving early is unclear, as any advantage a firm stakes out can be quickly eroded or imitated (D'Aveni, 1994;Schmalensee, 2000). Additionally, the true value of acquisition targets may not be stable or knowable early in acquisition waves in dynamic markets. ...
... These results are consistent with the notion that, in stable markets, acquirers can identify and value assets better than they can do so in more dynamic environments. In addition, the ability of early mover firms to establish a leadership position through acquisitions may be greater in stable markets (Schmalensee, 2000). In fact, there is some evidence that firms do better acting later in dynamic markets, possibly after some of the uncertainty within the market is reduced. ...
Acquisitions often occur in waves within industries. We extend the theoretical understanding of such waves by drawing upon research on early mover advantage and bandwagon effects to develop arguments regarding the likely performance potential of participating at different points in an acquisition wave. In line with our theoretical model, we find acquisition performance is higher for early movers but lower for acquirers that participate at the height of the acquisition wave. Although we find this general performance trend, our findings suggest both industry and acquirer characteristics influence the degree to which firms seize early mover advantages or fall prey to bandwagon pressures.
... Directors with relational capital use their network ties to gather strategic information from outside to ascertain the veracity and efficacy of strategic decisions (Carpenter & Westphal, 2001). Relational capital also aids the process of raising financial capital (Mizruchi & Stearns, 1988) and forging alliances and partnerships to enact firm strategy (Haunschild & Beckman, 1998 (Schmalensee, 2000;Stuart, 2000). To counter the rapid and uncertain technological changes in high IT-intensity industries, CITEs of firms in high IT-intensity industries foster relationship building through a broad range of IT experts, including their own IT employees, contractors, vendors, and partners, as well as boundary-spanning contacts such as other CITEs or industry experts (Rothwell & Dodgson, 1991). ...
... The second contextual condition, i.e., IT-intensity in the firm's industry, refers to the challenges a firm faces because of the level of IT use for competition in the firm's industry. Industries driven by high information technology use often undergo rapid technological change (Schmalensee, 2000), high frequency of innovation (Brown & Eisenhardt, 1997), and unpredictable variation in revenues, market shares, and firm profits (Baldwin & Clark, 2000;Shapiro & Varian, 1999) due to a high rate of entry and exit by competitors, product innovation, imitation (Giarratana, 2004), and obsolescence (Sorensen & Stuart, 2000). ...
In an increasingly digital world, C-level information technology experts (CITEs) such as CIOs and CTOs are playing an increasingly indispensable role in leading IT initiatives. Despite this, recent research shows a lack of oversight by the board of directors over the IT function due to the “IT confidence gap” of directors with no IT expertise. This has resulted in the emergence of a recent trend of appointing CITEs to the board of directors. However, there is little research on whether such appointments result in value creation for the appointing firms. We use perspectives from agency and resource dependence theories to examine two value impacts of CITE director appointments to address this question. We suggest that CITE director appointments create signaling value by enhancing the firm’s ability to signal their intention to institute more effective oversight of the IT function and subsequently accumulate value in the form of share price reaction to appointment announcements. Correspondingly, CITE directors’ human and relational capital application also creates substantive value in the form of firm financial performance over a longer duration. Using an event study and hierarchical linear modeling, our analysis of 334 CITE director appointments largely supports our contention that the human and relational capital of CITE directors and their appointment in firms facing IT-related contextual conditions results in both a positive share price reaction and better firm financial performance over the long term. We conclude that appointing CITE directors with the appropriate capital under certain contextual conditions leads to firm value creation.
... A primeira posição do debate é de que a situação de um monopólio (não concedido institucionalmente) raramente é confortável (Sidak e Teece, 2009;Schmalensee, 2000). A posição da empresa dominante repousa sobre bases frágeis, já que esta pode ser frequentemente contestada por rivais que visam se apropriar dos lucros extraordinários no mercado. ...
... ParaKatz e Shelanski (2005), a política antitruste deve ser adaptada (colocando, por exemplo, menos ênfase na concentração de mercado), mas precisa manter-se vigilante a condutas que possam reduzir a inovação no mercado. Esses autores parecem manter-se em uma posição intermediária entre os defensores da política antitruste ativa(Baker, 2008;Shapiro, 2011; Farrel, 2006) e os críticos mais enfáticos da intervenção(Schmalensee, 2000; Sidak e Teece, 2009). ...
... An intriguing field of strategy study is the dynamics of relatively young, high-tech environments, such as the laser and the biotechnology industries (Ilinitch, D'Aveni, and Lewin 1996;McKendrick et al. 2003). These industries, which the literature usually calls Schumpeterian environments, often exhibit intense competition, fragmented market shares, rapid technological change, scarce-scale economies, and little sign of consolidation around a few large players (Nelson and Winter 1978;Covin and Slevin 1989;Schmalensee 2000;Fosfuri and Giarratana 2007). ...
... It is a turbulent, competitive industry with fragmented market shares, high levels of firm mortality and negligible economies of scale at production. Furthermore, the environment witnesses the proliferation of 168 S.S. Sebrek young ventures and displays compressed product life cycles that can be ascribed to the fast pace of product innovation (Nelson and Winter 1978;Covin and Slevin 1989;Schmalensee 2000). ...
In young, innovative, and uncertain Schumpeterian environments, a pivotal way to achieve growth for the firm is the entry into a niche that forms part of the same industry. Given the fast-moving and competitive nature of Schumpeterian settings, we turn to firms' technological investment decisions, implied by the innovation management stream of literature, to study the ability of a firm to adopt an intra-industry diversification strategy. Empirical evidence from the encryption software industry demonstrates that patents and strategic technology alliances, two specific technological projects, positively influence intra-industry diversification. In a further inquiry, we find that when firms activate patents and strategic technology alliances simultaneously, the benefit of this technological portfolio on intra-industry diversification can be captured in more uncertain business environments.
... The digital technology environment has distinct implications for innovation and knowledge creation. The digital technology industry's environment sees frequent information technology-driven market actions, high frequency of incremental innovation, and turbulence in revenues, market shares, and firm profits (Baldwin & Clark, 2000;Schmalensee, 2000;Shapiro & Varian, 1999) due to a high rate of entry, exit, product innovation, and imitation (Giarratana & Mariani, 2014) and intense pressure for lower prices and higher efficiency (Bughin et al., 2018). Thus, the financial return margin and organizational slack for firms in such environments are slim, and firms must refine and expand existing products, services, and markets. ...
... production, or enhanced product offerings-that could ultimately benefit consumers (Carlton and Perloff, 2005). The more permissive stance towards mergers was particularly influential in the tech sector, where economies of scale and rapid innovation are crucial competitive advantages (Schmalensee 2000). ...
This chapter, from my book manuscript "The Political Economy of the Fourth Industrial Revolution," examines how changes to U.S. antitrust law catalyzed the rise of digital platforms and the Artificial Intelligence (AI) Revolution. It traces the evolution from early 20 th Century populist approaches, which sought to curb corporate dominance through per se prohibitions of various business strategies, to the adoption of the consumer welfare standard via the Rule of Reason approach. Contrary to the conventional narrative attributing this shift to the Chicago School, the chapter argues that it was primarily driven by courts and policymakers responding pragmatically to the complexities of real-world cases, decades before intellectuals such as Bork, Stigler, and Posner warned against capricious government intervention. Antitrust decision-makers, faced with concrete challenges, increasingly drew on insights from price theory, industrial organization, game theory, and Schumpeterian economics, leading to a more nuanced understanding of market power, efficiency, and innovation. As antitrust decision-makers worked to refine market definitions and analytical tools to address the distinct dynamics of network effects and data-driven business models, these insights were then applied to multisided platforms like Google, Facebook, and Amazon. The chapter also explores the recent resurgence of populist antitrust thought, which advocates for stricter regulation of tech giants, and considers its potential implications for the future of innovation.
... The 'essentiality' of platforms is often associated to situations in which trading with the platform is the way to reach consumers in the other side of the platform, acting thus as a 'gatekeeper' or 'bottleneck', including but not limited to: (i) very large market shares on oneside of a two-sided market organized by a platform; (ii) data availability required to design and efficiently operate the provision of services and goods to consumers in the other side of the platform (CREMER et al. 2019); (iii) technical standards or patents that must be used by sellers to market products in the (eco-system) platform (GUGGENBERGER, 2021b). 16 The distinction between competition in the market and competition for the market was originally developed by Schmalensee (2000). 17 It should be noted that gatekeeper power of an 'essential' facility is a concept used before digital platforms (e.g., publishing as in COSER, 1975 The dynamics of digital platforms exploit two concepts: bottlenecks and gatekeepers. ...
The paper examines the applicability of the Essential Facilities Doctrine (EFD) in the context of competition policy in digital platform markets. It begins by comparing this doctrine with the traditional antitrust approach to anti-competitive practices such as tying and raising rivals' costs. It demonstrates that both approaches aim to address antitrust harm resulting from the extension of market power into additional competitive environments. However, the EFD also considers specific conditions that warrant non-discriminatory access obligations and potential regulatory intervention. This comparative analysis of similarities and differences is employed to address antitrust issues in digital platform markets, given the existence of bottlenecks and gatekeepers that can exploit market power. The paper uses the Buscapé v. Google (Google Shopping) case, which was examined by Brazilian antitrust authority in 2019, as an illustrative example to highlight the possible approaches to these antitrust concerns. KEYWORDS: Essential Facilities Doctrine; Refuse to Deal; Market Power Leveraging; Digital Platforms, Antitrust Policy.
... This environmental state makes it difficult for firms to sustain competitive advantages and superior performance over time (Bettis & Hitt, 1995;D'Aveni, 1994;Ilinitch et al., 1996;Wiggins & Ruefli, 2005). The central hypercompetition thesis is that a combination of technological breakthroughs and globalization trends since the 1980s have led to a rise in this kind of competition (Bettis & Hitt, 1995;D'Aveni, 1994D'Aveni, , 1998D'Aveni & Dagnino, 2010;Nault & Vandenbosch, 1996;Schmalensee, 2000;Thomas, 1996). Technologyintensive sectors, such as the technology hardware and equipment sectors, are among those most commonly associated with this rise in the management literature. ...
Full version available for open download here: https://doi.org/10.1016/j.lrp.2023.102328
... De acuerdo con McNamara y otros (2008), el grado de estabilidad en una industria puede afectar la relación entre el momento de realizar una adquisición y el desempeño logrado por la empresa. Según Schmalensee (2000), en mercados más dinámicos, el valor de ser el primero en actuar no es claro, ya que cualquier ventaja lograda por la empresa puede ser rápidamente imitada. Adicionalmente, en mercados dinámicos, el valor real de las empresas adquiridas no puede ser estable o conocido al inicio de la ola. ...
This study offers insights into the behavior of Colombian companies that operated in industries characterized by waves of mergers and acquisitions between 1995 and 2008. The conclusion is that three years after, followers show stronger performance than first movers. Recommendations are offered to managers who plan to expand into the Colombian market via mergers or acquisitions.
... Si se le adiciona el ingrediente de qué tipo de empresa es la que cuenta con capacidad de innovación, se debe decir que son las grandes empresas las que tienen esa característica Schmalensee (2000). Esto se debe en buena medida a que desarrollar productos o servicios que se consideren innovadores requieren de presupuestos de magnitud considerable que no suelen estar presentes en las empresas pequeñas. ...
En este artículo se analiza la relación de causalidad entre los precios al productor y al consumidor para el caso de los países miembros del Tratado de Libre Comercio de América del Norte (TLCAN) durante el periodo 1957:01-2011:04. Para ello, se utilizan pruebas de raíz unitaria y de causalidad. Los resultados indican que la causalidad va en ambos sentidos, es decir, de los precios del productor a los precios del consumidor y de estos últimos a los primeros. Ambos precios tienen información útil que ayuda a predecir el comportamiento uno del otro.
... Just to mention some arguments, the software industry has really proved to be extremely dynamic, characterized by high rates of growth and, while competition in some software segments might result in "winner-takes-all" outcomes, dominant positions have been frequently displaced by new comers (see Schmalensee, 2000); in a word, markets have performed reasonably well. Moreover, it is not yet clear if the production mode of open source is really more innovative than the proprietary one and empirical evidence on this issue is far from being clear-cut. ...
Governments’ interest in free/open source software is steadily increasing. Several policies aimed at supporting free/open source software have been taken or are currently under discussion all around the world. In this chapter, we review the basic (economic) rationales for such policy interventions and we present some summary statistics on policies taken within the European countries. We claim that in order to evaluate correctly the consequences of such interventions one has to consider both the role and the administrative level at which such decisions are taken as well as the typology of software that is involved. Moreover, we argue that the level playing field cannot be taken for granted in software markets. Therefore, non-intrusive public policies that currently prevail at the European level in terms, for instance, of the promotion of open standards or in terms of campaigns aimed at informing IT decision-makers, are likely to be welfare enhancing.
... Market concentration and the rise of dominant firms may, for example, be all but inevitable in the production of goods and services subject to winnertake-most properties. 108 But this does not mean that the exercise of market power by a dominant firm in such a position is not still problematic, 109 nor that consumers could not benefit from a greater number of independent competitors. 110 Here, again, an entrenchment approach to merger enforcement may offer solutions that elude contemporary antitrust policy. ...
Mounting public concern with the exercise of market power in concentrated markets demands a response. While modern antitrust emphasizes the prevention of market power over reaction to its exercise, it does contain one indirect but potentially important tool for addressing problems with already existing concentration and market power: the often-overlooked theory of resistance to anticompetitive entrenchment in merger enforcement. This article explores how traditional concerns with the entrenchment of market power might be updated and reintroduced to serve as a vehicle for addressing problematic markets in the modern antitrust framework. The article explains this theory of anticompetitive entrenchment, its limits, and appropriate conditions for its use, in the context of two specific applications: (1) tacit collusion among oligopolists, and (2) the exploitation of market power by a dominant firm in a protected position.
... While application software performs specific end user functions, infrastructure software includes operating systems and data center management tools (Bokhari 2007). The software industry has several unique features including low entry and exit barriers, minimal marginal production costs, quick production innovation and short product life cycle (Schmalensee 2000;Giarratana and Fosfuri 2007). A product's life cycle depends on the function and market. ...
Firm failure rate in the software industry is significantly higher than other industries. Due to the wide use of software products and services, failure in the software industry has implications on the industry itself as well as the economy at the local, national and global levels. This study compares the classification performance of thirteen approaches in terms of predicting firm failure in the US software industry. Seven measures are used to evaluate the classifiers’ performance. We use synthetic minority oversampling technique (SMOTE), SMOTEBoost and SMOTEBagging to account for the data imbalance issue. In order to give managers enough time to develop strategies and take the necessary actions to reduce the likelihood of failing, we use 20 financial indicators collected 4 years before the last available date about each firm. Our findings show that embedding SMOTE into boosting and bagging algorithms is better than preprocessing data using SMOTE before learning the classifier. According to the sensitivity analysis, research and development expense is the most significant predictor of firm failure followed by net sales and total revenue. Our results can be used by managers as a decision support tool to identify high-risk firms at an early stage and take the necessary actions to prevent a firm from failing. The early prediction of firm failure will allow software firms to modularize their products or services into specific “features” and offer them as “digital services” using new business models or combine these services with partner firms’ services to create new products and address evolving customer expectations. Moreover, the early prediction of firm failure in the software industry calls on firms, both new and those in the growth stage, to componentize their design for adaptability and to build agility in the way firms use their resource mix to address both market gaps as well as operational gaps.
... Strategies include platform envelopment, adopted for example by Amazon, that used its profits to tap into new markets by subsidizing cloud-computing services or by using its information superiority to out-compete internal complementors (Zhu and Liu 2018). Other examples are antitrust cases, such as those against Microsoft and Google (Iacobucci and Ducci 2019;Schmalensee 2000) that show the relevance and importance of the so-called "winner-take-all" effect of two-sided markets (Cennamo and Santalo 2013). ...
Digital platforms are an omnipresent phenomenon that challenges incumbents by changing how we consume and provide digital products and services. Whereas traditional firms create value within the boundaries of a company or a supply chain, digital platforms utilize an ecosystem of autonomous agents to co-create value. Scholars from various disciplines, such as economics, technology management, and information systems have taken different perspectives on digital platform ecosystems. In this Fundamentals article, we first synthesize research on digital platforms and digital platform ecosystems to provide a definition that integrates both concepts. Second, we use this definition to explain how different digital platform ecosystems vary according to three core building blocks: (1) platform ownership, (2) value-creating mechanisms, and (3) complementor autonomy. We conclude by giving an outlook on four overarching research areas that connect the building blocks: (1) technical properties and value creation; (2) complementor interaction with the ecosystem; (3) value capture; and (4) the make-or-join decision in digital platform ecosystems.
... Market share measurement is inherently static in nature and therefore quite limited in predictive value in markets that exhibit "fragility" due to their technologically-dynamic character. 150 Indeed, in commenting in CRTC 94-19 on the conditions that are likely to render a market workably competitive, the Canadian Regulatory Commission observed that: ...
The primary objective of this manuscript is to articulate a set of economic principles to assist policymakers in their deliberations on the issue of deregulation in telecommunications markets. The key question confronting policymakers concerns when the discipline imposed by competition can substitute for the discipline imposed by regulation. The complexity of this question is exacerbated by the technological dynamics of the industry: The product market is being redefined, “rents from incumbency” are considerably diminished and market share measures—recognized to be unreliable indicators of market power, particularly in regulated industries—are at best yesterday’s snapshot of a marketplace in rapid and largely irreversible competitive transition
... As stated by Evans, web-based businesses are likely to become a target of antitrust campaigns due to their character as Schumpeterian industries [285]. The utilisation of network effects to gain and secure a market-dominating position in SNS markets shows similarities to the backgrounds of the antitrust cases against IT firms such as IBM and Microsoft [285,286]. ...
The first concept of privacy was provided by Samuel D. Warren and Louis Brandeis in 1890 as “the right to be left alone”. At that time, the world was more than a century away from people voluntary disclosing information and sharing data on a large scale via the Internet on social networks such as Facebook. Today, the business model of the major social networks contain a thirst for their users’ personal data which threatens user privacy. Information and power asymmetries hinder users from enforcing their privacy preferences. Furthermore, network effects and switching costs tie them to the market leading networks.
The dissertation at hand analyses the topic of privacy in social networks from an information systems and economic research viewpoint. It illustrates privacy factors in the social network environment and examines the related dynamics of user privacy. As such, this thesis analyses whether the status quo of privacy in social networks is economically inefficient or leads to inefficiency, and whether governmental regulation is required. Moreover, existing approaches to solve the privacy challenge in social networks business are assessed and the most promising concepts are emphasized.
... In high-speed environments, characterized by innovation and technological change (Brown & Eisenhardt, 1997;Schmalensee, 2000), international expansion is a strategic choice to rapidly enter new markets and acquire customers and/or complement internal R&D efforts. Software firms can easily be the object of takeovers because they are not physically confined by nature. ...
This study specifically focuses on the software market and tries to identify the sources that intensify equity investments through merger and acquisition (M&A) paths. Increasing the firm size and accessing new growth opportunities is particularly significant in the software industry. Consistent with this view, this work focuses on the cross-border strategies that could be used to manage value creation processes. The results found are based on the fact that diversification of the geographic market (acquiring cross-border technology) is relevant to the positive answers given by the stock markets. Moreover, the age of the target firm strongly influences M&A decisions and the younger the target firm is, the higher the possibility of creating value, but this variable increases uncertainty in the evaluation of the target firm, decreasing the purchase offers. The complementary nature between the acquiring and the target firm and the size of the investing firm influence market return and appear to be linked. These results provide empirical evidence on the use of financial measures to determine the goodness of an acquisition but, above all, they provide a new reading of the evaluation of the complementary nature between the buyer and the target firm.
... This could be why estimates of PC operating system margins on the basis of elasticities appear to be much higher than their actual empirical values (e.g. Werden, 2001, Schmalensee, 2000and Reddy et al., 2001). ...
When will a monopolist have incentives to foreclose a complementary market by degrading compatibility/interoperability of his products with those of rivals? We develop a framework where leveraging extracts more rents from the monopoly market by "restoring" second degree price discrimination. In a random coefficient model with complements we derive a policy test for when incentives to reduce rival quality will hold. Our application is to Microsoft's strategic incentives to leverage market power from personal computer to server operating systems. We estimate a structural random coefficients demand system which allows for complements (PCs and servers). Our estimates suggest that there were incentives to reduce interoperability which were particularly strong at the turn of the 21st Century.
... Chinese firms tend to be more ambidextrous under the influence of Confucius's middle-way philosophy (Chen, 2002;Chen and Miller, 2010;Chen and Miller, 2011;Li and Liang, 2015). Third, the software industry is characterized by rapid technological change and innovation (Schmalensee, 2000), and is often regarded as the epitome of the technology industry with hyper-competition (Lee et al., 2010). Fourth, software firms need to apply developing technology to repair and modify their products frequently to fit the changing market (Barry et al., 2006). ...
Causation and effectuation are acknowledged as two fundamental strategic decision-making logics that firms use to form strategies to cope with uncertainty. Using data collected from 312 software firms in an emerging economy, we explore the effects of causation and effectuation on firm performance. In addition, we investigate the contingent interaction effects between causation and effectuation on firm performance from the perspective of organizational ambidexterity. We find that (1) causation and effectuation have a positive interaction effect on firm performance when environmental uncertainty is (relatively) high, but have a negative interaction effect on firm performance when environmental uncertainty is (relatively) low; (2) causation has a positive effect on firm performance in emerging economies; and (3) effectuation has a positive effect on firm performance in emerging economies when environmental uncertainty is (relatively) high. Our findings suggest entrepreneurial firms in emerging economies use a combination of causation and effectuation in a more uncertain environment, and adopt causation as a priority in a less uncertain environment.
... This gap is highly problematic, since most strategists subscribe to the idea that innovation and exploration are not only tantamount to interfirm competitive dynamics; they are also the underlying engine of industrial, strategic, and organizational competitiveness (Aldrich, 1999;Henderson & Clark, 1990;Porter, 1985). Schumpeter pointed that "new technology" drives the "perennial gale of creative destruction" (1950: 84), whereby technological change and innovation enable new players to challenge and threaten industry leaders (Evans & Schmalensee, 2001;Schmalensee, 2000). Porter also declared that "of all things that can change the rules of competition, technological change is among the most prominent" (1985: 164). ...
... This controversial and complex case was characterized by Microsoft as an unwise attack on its success in developing new technology. This view builds in part on Joseph Schumpeter's (1950) idea that an important form of competition involves innovation-stimulating struggles for market dominance, success at which generates economic rewards that incentivize investment in research and development of successive generations of technology (Evans and Schmalensee 2002;Schmalensee 2000). From a Schumpeterian perspective, Microsoft's monopoly of operating system software, far from being regrettable, was a necessary and temporary stimulant of continued technological progress. ...
Whether the firms that supply Internet hardware and software should face restrictions on the use of their property is an important and controversial policy issue. Advocates of “net neutrality”—including President Obama and the current FCC majority—believe that owners of broadband distribution systems (hardware used to distribute Internet and video services) and producers of certain “must-have” video content should be subject to prophylactic regulation that transcends present-day antitrust law enforcement. In the economic terms that are used in debates on competition policy, the concern is with vertical integration that may give firms both the opportunity (through denial of access or price discrimination) and incentive (increased profit) to restrict competition. This paper’s central point is that virtually every production process in the economy is vertically integrated, and economics predicts changes in the extent of vertical integration—that is, changes in the boundaries of the firm—in response to changes in relative prices, technology, or institutions. Both vertical integration and changes in the extent of vertical integration are benign characteristics of efficient, dynamic, competitive markets. While there is no shortage of theoretical models in which vertical integration may be harmful, most such models have restrictive assumptions and ambiguous welfare predictions—even when market power is assumed to be present. Empirical evidence that vertical integration or vertical restraints are harmful is weak, compared to evidence that vertical integration is beneficial—again, even in cases where market power appears to be present. Thus, it is reasonable to conclude that prophylactic regulation is not necessary, and may well reduce welfare. Sound policy is to wait for ex post evidence of harm to justify interventions in specific cases. Net neutrality, recently enacted by the FCC but subject to judicial review, is an unfortunate idea.
... Thus, entrants are more likely to undertake radical innovation that introduces turbulence, depletes the value of the incumbents' stock of dedicated resources, and selects out those that are unable to adapt (Mudambi, 2008a;Schmalensee, 2000). For example, numerous instances of technology``leapfrogging'' have been documented for the U.S. video game console industry, wherein entrants introduced radical new technological standards that displaced existing industry leaders (Schilling, 2003). ...
Competition may be the most important determinant of firm performance.
Keywords:
the timing of competitive entry;
incremental, breakthrough, and architectural innovation;
standard-setting and dominant designs;
concluding remarks
... Em "indústrias schumpeterianas", os monopólios são comuns, mas frequentemente substituídos por ondas de destruição criativa, onde a competição não é direcionada por preços, mas por novas tecnologias que podem não apenas corroer as margens de lucro, mas também destruir as fundações dos seus negócios (SCHMALENSEE, 2000). ...
Global Value Chain (GVC) Governance studies analyzed a great spectrum of industries last 20 years, but GVC research on information goods industries and the impact of the internet on GVC coordination and normalization is limited. Credit Cards, Operational Systems, Digital Games and Mobile Applications are some classic examples of industries that have platform providers, which mediate suppliers and consumers’ interactions. In recent years, the development of digital platforms in traditional industries possible disruptive movements, known as uberization. Relationships platforms are designed to be multilateral and have network effects to attract a greater volume of participants, which changes the nature of coordination in relation to traditional chains based in successive bilateral relationships. From a normative point of view, the platforms are based on the project convention, typical of the "new spirit of capitalism", which justification logic not yet incorporated into the GVCs governance framework.
This work proposes governance through platform as a new type of governance and combining the approaches of coordination and standardization. The digital games industry was chosen because both have technology platform characteristics and distribution, respectively emphasized in the literature on industrial and multilateral platforms.
Mixed methods were used for research in three countries (South Korea, Finland and Brazil): questionnaires given to 235 developers of digital games, 73 interviews with developers, publishers and public managers, and 6 interviews with representatives of platforms and research documentary on the global industry.
The analysis confirmed the importance of network effects and that the governance platform has simultaneously governance characteristics present in types already established in the literature and distinctive characteristics in both the coordination aspects as the normative aspects. It also confirmed the adherence to the project convention to understand this type of governance.
... Established software product vendors are threatened by reduced barriers to entry. With software product innovations happening rapidly [1] and leadership positions in software product industry becoming fragile [2], software product industry is increasingly becoming a risky proposition with firms ending up in bankruptcy in a short span of time. For example, from 1995 to 2007, exit rate in software product industry was three times that of pharmaceutical industry and two times that of hardware industry [1]. ...
Operating in software product industry is becoming an increasingly risky proposition. Compressed timeline for product development combined with need to reduce cost has compelled organizations to look at new ways of doing business. One such avenue is combining the erstwhile conflicting practices of open source and closed source software. This industry paper highlights common patterns and challenges encountered in operationalizing such business models. The findings are based on a larger multiple case study research involving six such software products. © 2012 IFIP International Federation for Information Processing.
... De acuerdo con McNamara y otros (2008), el grado de estabilidad en una industria puede afectar la relación entre el momento de realizar una adquisición y el desempeño logrado por la empresa. Según Schmalensee (2000), en mercados más dinámicos, el valor de ser el primero en actuar no es claro, ya que cualquier ventaja lograda por la empresa puede ser rápidamente imitada. Adicionalmente, en mercados dinámicos, el valor real de las empresas adquiridas no puede ser estable o conocido al inicio de la ola. ...
En este estudio se analiza el comportamiento de las empresas colombianas en industrias caracterizadas
por olas de fusiones y adquisiciones durante el periodo 1995-2008. Se concluye que
en términos de rentabilidad, las empresas seguidoras muestran ventaja en comparación con los
primeros entrantes en la ola tres años después de la operación. Se ofrecen recomendaciones a los
gerentes que contemplan entrar en el mercado colombiano vía fusiones o adquisiciones.
... This gap is highly problematic, since most strategists subscribe to the idea that innovation and exploration are not only tantamount to interfirm competitive dynamics; they are also the underlying engine of industrial, strategic, and organizational competitiveness (Aldrich, 1999;Henderson & Clark, 1990;Porter, 1985). Schumpeter pointed that "new technology" drives the "perennial gale of creative destruction" (1950: 84), whereby technological change and innovation enable new players to challenge and threaten industry leaders (Evans & Schmalensee, 2001;Schmalensee, 2000). Porter also declared that "of all things that can change the rules of competition, technological change is among the most prominent" (1985: 164). ...
Prior studies of multimarket contact have investigated " exploitation" rather than "exploration" activities. We contrast effects of multimarket contact on entry and exit dynamics in these two settings and propose that, although in exploitation, firms seek to optimize multimarket contact based on mutual forbearance benefits, in exploration, firms instead seek to reduce uncertainties through mimetic entry and exit. Analyses of biopharmaceutical firms' competitive dynamics from 1989 to 1999 support our model. We also find that multimarket contact in exploration leads to competitive entry and exit in exploitation, but not vice versa. We discuss implications for theory and practice.
... Inventive capability remains an important source of competitive advantage (Ilinitch, D'Aveni and Lewin, 1996;Schmalensee, 2000;Sorenson, 2000), but a firm's inventive success and research productivity depend on more than internal competencies; they also require the ability to acquire and combine knowledge from external sources (Chesbrough, 2003;Fosfuri, 2006;Rosenkopf and Nerkar, 2001). ...
This article investigates the relative use of internal versus external sources of knowledge in research processes that lead to patented inventions. An empirical test employs 5,590 observations from a unique and extensive data set, drawn from a large survey of European patents. Consistent with the hypotheses, the use of external knowledge correlates positively with the level of the investment in the research project and with the knowledge endowment of the region. However, the combination of the two factors creates a trick of the tail: Firms adopt entrenchment strategies and rely less on sources that span organizational boundaries when they conduct large R&D investments in regions with rich knowledge endowments. The results are robust across different model specifications.
Reference to an Austrian or neo-Austrian economist has appeared in the American Economic Review each year since the journal was first published in 1911. Topics examined in the first (1911-20) and last decades (1995-2004) of the AER’s publication include mathematics’ role in economics, the business cycle, and government central planning and interventionism.
The regulation of innovation and the optimal design of legal institutions in an environment of uncertainty are two of the most important policy challenges of the twenty-first century. Innovation is critical to economic growth. Regulatory design decisions and, in particular, competition policy and intellectual property regimes can have profound consequences for economic growth. However, remarkably little is known about the relationship between innovation, competition and regulatory policy. Any legal regime must attempt to assess the trade-offs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors. The essays in this book approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers.
Purpose
This paper aims to compare products traded in secular and Islamic banking environments prior to the credit crunch of 2007–2008; to locate the comparison in a Schumpeterian model of creative destruction of dynamic innovation in the capital markets; and to evaluate the implications for diversity of investor product choice.
Design/methodology/approach
Financial products are critiqued using qualitative criteria, including underestimation of risk implicit in mortgage-backed securities and securitisation, excessive speculative activity in credit default swaps and the magnification of leverage and volatility. Comparable Islamic products are considered for the extent to which they facilitate the same precursors of market crises.
Findings
Innovation in secular financial markets has traditionally led to asset bubbles, underestimation of risks and market exuberance. Islamic banking constrains creativity by prohibiting risk transference and disconnection of financing activity from social context and economic purpose. As such, the latter reduces Schumpeterian creative destruction but at the cost of reduced investor choice and market liquidity. Restriction of the reallocation of risk between those who do not wish to hold it and those who do dampens innovation but would have prevented the trading of products which contributed to the credit crunch.
Originality/value
The constraining effect of Islamic banking upon creativity and innovation is considered alongside its capacity to reduce market volatility, speculation and systemic instability. Schumpeterian theory deepens the analysis in terms of the drivers of innovation and market collapse.
The ascending economic and political influence of the internet platforms of the 21st century has sparked a debate about the adequate regulation of these “tech titans”. At the heart of this discussion is competition law – the field of law that was created to tame dominant companies. But when does a company truly hold such a “dominant position”? The definition of this fundamental competition law term faces numerous challenges when applied to digital platforms, from zero-price markets to the multi-sidedness of business models. This book dismantles the term into its components and shows where the methodology needs to adapt to the digital economy. In doing so, it considers the legal regimes of Germany, the EU and the US, as well as findings from legal economics.
The ascending economic and political influence of the internet platforms of the 21st century has sparked a debate about the adequate regulation of these “tech titans”. At the heart of this discussion is competition law – the field of law that was created to tame dominant companies. But when does a company truly hold such a “dominant position”? The definition of this fundamental competition law term faces numerous challenges when applied to digital platforms, from zero-price markets to the multi-sidedness of business models. This book dismantles the term into its components and shows where the methodology needs to adapt to the digital economy. In doing so, it considers the legal regimes of Germany, the EU and the US, as well as findings from legal economics.
The ascending economic and political influence of the internet platforms of the 21st century has sparked a debate about the adequate regulation of these “tech titans”. At the heart of this discussion is competition law – the field of law that was created to tame dominant companies. But when does a company truly hold such a “dominant position”? The definition of this fundamental competition law term faces numerous challenges when applied to digital platforms, from zero-price markets to the multi-sidedness of business models. This book dismantles the term into its components and shows where the methodology needs to adapt to the digital economy. In doing so, it considers the legal regimes of Germany, the EU and the US, as well as findings from legal economics.
This article focuses on the way greenfield foreign direct investment (FDI) in different sectors is influenced by locational characteristics and explores the role of policy in attracting and retaining foreign investment. We contribute to the literature by empirically investigating the investment motivations of multinational companies in the software and information technology (IT) and financial services sectors in Ireland and those locational factors that contribute to the retention of FDI. The methodology used in this research is of a qualitative nature, and an exploratory deductive approach is adopted in order to gain an understanding of firms' internationalization decisions and motivations. The data demonstrate that companies in the two sectors follow different investment motivations. Firms in the software and IT sector entered Ireland primarily because of the availability of a high-quality workforce, whereas firms in the financial services sector entered Ireland following the deregulation of markets and the subsequent ease of doing business. The article builds on these findings to develop policy recommendations.
We have so far looked at the building blocks of business model innovation and have seen some applications of it in software product context. In this chapter, we discuss an important intervention that indeed fuelled the change in the typical build-own-sell approach: the open source software (OSS). There are three major takeaways that you can expect from this chapter: how open source software emerged in a wider context of software product industry, how it differs from a proprietary software product, especially in terms of licensing, and some introduction to how the two approaches (open source software and proprietary software) can be merged, creating a hybrid approach. Overall, this chapter is a conceptual window for the subsequent two chapters.
In this paper we scrutinize the request to regulate access to the OTTs’ essential services bottleneck based on insights from the economic literature. First, we delineate that OTTs may pursue a one-sided or two-sided business model, which makes a fundamental difference with respect to the underlying economics. Focusing on two-sided content markets, we then discuss three scenarios that differ in the degree of competition that OTTs may face, ranging from potential competition over access-based competition (via access regulation) to actual platform competition. Although access regulation may have merits, it is very questionable whether such regulation should be pursued due to a high uncertainty concerning the economic benefits and necessity as well as practical legal problems.
We study de facto standard setting in markets with network effects. We closely examine the “browser war,” in which Netscape Navigator at first appeared likely to be a de facto standard, but Microsoft Internet Explorer eventually became the standard. This reversal is a puzzle we seek to explain. We draw on the theory of standard setting, especially on the positive economics predictions about market outcomes, such as a tendency to tip and a tendency toward inertia. The basic insights of standard setting theory are borne out in the browser war. In addition, linking standard setting logic to an analysis of market conditions, such as the rate of growth of demand and the distribution system, leads to a complete positive theory of standard setting. This complete theory explains the otherwise surprising reversal.Introduction De facto standard setting We study de facto standard setting in markets with network effects. In markets for system goods – e.g., a computer and the software that runs on it, a CD player and music, a computer connecting to Internet websites – interface standards are particularly important. Like the other chapters in this book, we define interface standards as technical specifications that determine the compatibility or interoperability of different technologies. In such markets, standard setting is linked to the exploitation of network effects. © Cambridge University Press 2007 and Cambridge University Press, 2009.
Harold Demsetz once claimed that “economics has no antitrust relevant theory of competition.” Demsetz offered this provocative statement as an introduction to an economic concept with critical implications for the antitrust enterprise: the multidimensional nature of competition. Competition does not take place on a single margin, such as price competition, but several dimensions that are often inversely correlated such that a liability rule deterring one form of competition will result in more of another. This insight has important implications for the current policy debate concerning how to design antitrust liability standards for conduct involving both static product market competition and dynamic innovative activity. The primary purpose of this chapter is to revisit Demsetz's broader challenge to antitrust regulation in the context of the frequently discussed trade-offs between innovation and price competition. I summarize recent developments in our knowledge of the relationship between competition and innovation, highlighting the deficiencies that significantly constrain antitrust enforcers' abilities to confidently calculate inevitable welfare trade-offs. I conclude by discussing policy implications that follow from these limitations. Introduction Understanding the complex relationship between competition and innovation is essential to the execution of the antitrust enterprise in our modern economy. The relationship has posed a significant challenge to antitrust economists at least since Joseph Schumpeter's suggestion that dynamic competition would result in “creative destruction” leading to a competitive process where one monopolist would replace another sequentially as new entrants develop a superior product.
Despite marked parallels in the language of their antitrust laws and the increasing use of economic expertise in developing
agency positions, the United States and the European Union exhibit strong continuing differences in competition policy. This
is especially true in policy towards what is called “the new economy” or “dynamically competitive industries.” This article
first explicates a recurring pattern that typifies much of the new economy and identifies intellectual property interacting
with network effects as the central dynamic. In some critical industries, this interaction generates a uniquely powerful,
but also uniquely vulnerable, competitive situation. Transatlantic policy differences towards dynamically competitive industries
are documented, and the roots of those differences are explored in three dimensions: institutions; ideology and doctrine;
and economic nationalism.
This paper analyzes the link between economics and the resource-based view (RBV) of the firm. Although, historically there has been a strong link between the disciplines of strategy and economics, explicit citations of key RBV works has been disappointingly low in mainstream economics journals. However, there are substantial bodies of works that build implicitly on the ideas of the RBV, in particular the consequences of path dependency on firm behavior, to explain a number of different economic issues. The issues we review in the paper are all influenced by path dependency and include: (1) diversification and market entry, (2) corporate refocusing, and market exit, (3) explaining innovative activity among firms, (4) diversification and performance and (5) industry evolution with rapidly changing products. Furthermore, we identify a number of reasons that may have limited the explicit use of the RBV in economics, which include the problems of causal ambiguity, tautology and firm heterogeneity. Finally, potential areas for future research are identified, which include the interaction of the RBV and Agency Theory, the RBV as a dynamic theory, using the RBV to explain radical change and the application of the RBV to issues of antitrust.
The Internet continues to transform the information industries and challenge intellectual property law to develop a competition policy strategy to regulate networked products. In particular, inventors of "information platforms" that support the viewing of content - be they instant messaging systems, media players, or Web browsers - face a muddled set of legal doctrines that govern the scope of available intellectual property protection. This uncertainty reflects a fundamental debate about what conditions will best facilitate innovation in the information industries - a debate most often played out at the conceptual extremes between the "commons" and "proprietary control" approaches to the Internet and intellectual property policy. This Article proposes a "competitive platforms model" as a new conceptual framework to govern intellectual property and Internet policy. This model suggests that where information platforms will continue to face competitive alternatives, intellectual property law and policy should encourage competition among them as a means of driving companies to develop superior products and enabling them to appropriate rewards from their inventions. Alternatively, where a particular information platform emerges as the dominant one - for example, in the case of Microsoft Windows in the market for PC operating systems - intellectual property protection against the reverse engineering of its platform standard or user interface should recede. As a strategy to implement the competitive platforms model, this Article proposes a reformulation of the fair use and misuse principles - as developed in both copyright and patent law - to provide a unified, clear, and coherent framework for protecting platform standards and user interfaces. Moreover, the competitive platforms model calls upon industry standard-setting bodies and the federal government to reassume the critical coordination and funding roles they served in the early days of the Internet in order to support the development of the parts of the Internet's information infrastructure that are intrinsically open to all and thus are vulnerable to underinvestment.
This paper develops a model of pricing to deter entry by a sole supplier of a network good. The authors show that the installed user base of a network good can serve a preemptive function similar to that of an investment in capacity if the entrant's good is incompatible with the incumbent's good and there are network externalities in the demand for each good.
The authors examine thirty years of computer industry market structure. Their analysis explains the persistence of dominant computer firms, their recent decline, and the changing success of competitive entry. It emphasizes the importance of technological competition between computer 'platforms,' not firms. This aspect of competition has changed little over time. Two things did change. Young platforms serving newly founded segments eventually challenged established platforms across segment boundaries through a process of indirect entry. Vertically disintegrated platforms have led to divided technical leadership in important segments. The result is an industry with far more technological competition. Copyright 1999 by Blackwell Publishing Ltd
All the Facts that Fit: Square Pegs and Round Holes in U.S. v. Microsoft
- David S Evans
Evans, David S. "All the Facts that Fit: Square
Pegs and Round Holes in U.S. v. Microsoft." Regulation, 1999, 22(4), pp. 54-
63.