What Kind of Competition Policy For Highly Innovative Markets with Network Effects?

The main problem in the application of antitrust policy is to deter anti-competitive conduct that is anti- competitive, while not discouraging the very competitive behaviour antitrust is designed to protect. Immediate solutions are not easy to determine, where traditional economic sectors are concerned, and become even more difficult when we consider what is commonly called the “new-economy”. The purpose of this paper is to demonstrate the inadequacy of “new” antitrust theory in evaluating such regulation of high-tech markets with network effects. Antitrust literature has evolved over the last thirty years with the development of contestability theory. The aim of this theory is to provide a different analysis of market competition and finally a new vision of monopoly power. Baumol, Panzar and Willig break with the older perception which suggested that market competition is related to market structure and which employed variables such as industrial concentration, firm size and market share to measure degrees of competition. The contestability theory introduces a new concept, in which the relevant criterion is the existence of barriers to entry and exit in a market. In this paper we hold that there is a consistent difference between the kind of competition that some authors call “static”, in opposition to the concept of “dynamic” competition. The “static” competition is characterized by price changes at the margin, or minor improvements in the product. “Dynamic” competition, which is explained by Schumpeter, occurs through market-destroying innovations. It is competition for the market rather than competition in the market. In the following we explain the main characteristics of markets where dynamic competition takes place, and why the application of contestability theory in the regulation of such markets could be dangerous. In addition, we suggest a “market process” view of competition, which we find more useful for regulatory policy precognitions of new-economy markets. One can take the example of deregulation of telephony, electric power, airlines and railroads.