Teece and Sidak on dynamic competition

Lynne Kiesling

Over at Truth on the Market, Josh Wright has organized a forum for discussing whether or not the U.S. federal merger guidelines used by the DOJ and FTC need to be revised, to accompany the public comment process on the question that the agencies have initiated. The commenters are all heavy hitters in antitrust, and so far the remarks have been insightful and thought-provoking. I particularly appreciated the contribution from David Teece and Gregory Sidak on dynamic competition, which included this observation:

Put succinctly, competition policy rooted in static economic analysis sees the policy goal as minimizing the Harberger (deadweight loss) triangles from monopoly. A new competition policy, recognizing the special power of dynamic competition, would advance the availability of new products and the co-creation of new markets that allows latent demand (and hence new amounts of consumer surplus associated with new demand curves) to be realized by consumers. It would also recognize cost savings flowing from innovation as an indicator of likely future consumer welfare gains. Put differently, the focus of a revised competition policy and merger-guideline framework would still very much be on the consumer, but it would be future-oriented and would recognize that certain business practices might lead to market creation (or at least co-creation) that would yield new demand curves with large gains in consumer surplus (because demand for new products could be satisfied). The minimization of Harberger deadweight loss triangles would be a secondary focus. Where minimizing Harberger triangles today stands in the way of creating new and significant future demand curves, a new competition policy would likely favor the future and recognize the welfare benefits associated with creating or co-creating new markets.

Note how relevant this point is to regulatory policy. I could do a global search-and-replace for “competition policy” with “regulatory policy” in the above excerpt, and it would almost entirely represent my thinking on the incorrectly static nature of regulatory policy in electricity.