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Big Tech but Bigger Ideas

Bowman Heiden —  30 November 2020
[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Bowman Heiden (Co-director of the Center for Intellectual Property (CIP), a joint center between University of Gothenburg (Sweden), Chalmers University of Technology (Sweden), and the Norwegian University for Science and Technology).
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As an academic working at the intersection of economics, law, and innovation, I was excited to see Nicolas Petit apply an interdisciplinary approach to investigate big tech in the digital economy. Working across law, business, and engineering has taught me the importance of bringing together different theoretical perspectives and mindsets to address complex issues. [RL1] Below is a short discussion of a few interdisciplinary areas where Petit helps us to bridge the theoretical gap so as to unveil the complexity and provide new insights for policymakers.

Competition Strategy vs. Competition Law

Business schools do not typically teach competition law and law schools do not teach competition strategy. This creates a theoretical disconnect that spills over into professional life. Business schools tell students to create a sustainable competitive advantage, which often means building a dominant market position. Law schools, on the other hand, treat dominant positions as socially undesirable and likely illegal.

As Petit points out, one of the main competitive strategy frameworks—the Porter’s Five Forces model, named for Michael E. Porter of Harvard Business School—provides a much broader perspective on rivalry than legal regimes like the OECD’s Competition Assessment Toolkit, which use a product-centric “more restrictive method of competitive assessment.” The progression of technology and new creative business models, such as multisided platforms, thus continuously push the frontier. Over time, this fundamentally alters the nature of competition within product markets as a unit of analysis.

If one seeks answers within “the law,” there will always be a lag between commercial reality (i.e., market norms) and legal doctrine (i.e., statutory norms). Petit reminds us that big tech is a different kind of competition whose holistic nature may require a new analytic framework to understand its welfare effects. If the fundamental principles of market competition are changing, we will not likely find the answer in historical precedents.

Innovation and Entrepreneurship vs. Economics

Given the focus on innovation as the key source of economic development, it is strange that innovation plays such a small role in mainstream economics. Schumpeter tried to convince us some 80 years ago that the market power generated from innovation and entrepreneurship had a positive economic impact, even for larger firms. But his concept of “creative destruction” has never really been able to gain much ground over the “invisible hand.” One cannot help but conclude this is because the static world is easier to understand and model mathematically than the dynamic world.

But the world is not static. Even if we agree that we are concerned primarily with welfare, we still need to decide whether we want to be better off now or later. A static analysis of welfare promotes a world without innovation. It is almost as if economics doesn’t appreciate “time” as a variable. If Schumpeter is right and it is disequilibrium, not equilibrium, that is the most relevant economic phenomenon, then we have the cart in front of the horse. Does innovation breed competition or does competition breed innovation? If the market power associated with innovation produces greater welfare than perfect competition, then how useful is competition as a proxy for welfare? In other words, if perfect competition inhibits innovation and dynamic efficiency, then more competition cannot be a societal goal in of itself.

Having time as a core variable forces us to think about the future and how we get from here to there. It is not enough to model evolution in the short term as a sea full of fish, and in the long term, as a city full of people. How the world changes and how quickly it changes are also important. Even with the long-term benefits of creative destruction, it is important to remember that a significant group of voting-age citizens will likely suffer in the short term.

Petit’s discussion of big tech’s exploration, change and pivot flexibility implicitly reminds us that time matters. Time is the carrier of innovation and uncertainty. This has fundamental impacts on the nature of competition and competition’s impact on welfare, which cannot be properly understood only through comparative statics. Though he claims his goal is “not to formulate a new Schumpeterian theory of monopoly efficiency,” he is rightly Schumpeterian in moving innovation and uncertainty closer to the center stage of analysis in law and economics.

Certainly, in a dynamic, global market, there is credence to Petit’s supposition that market power in digital markets can be welfare enhancing in the short term and can potentially instigate innovation, particularly disruptive innovation, in the long term. Both constraints and uncertainty typically spur innovation.

Politics vs. Economics

If ignorance was our only challenge in pursuing enlightened public policy, there would be little to worry about. We would constantly generate hypotheses and test them empirically to adapt to a changing world. Unfortunately, we have two more formidable adversaries: ideology and self-interest.

Ideology is cognitive closure, a type of self-inflicted ignorance, where someone internalizes a set of beliefs that defines who they are. All new information that contradicts the chosen ideology will likely be rejected as a starting point (e.g., the notion that big is always bad). This is what Max Planck meant when he said “a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” The world is full of ideologues; nowadays, the objective centrist is the radical, which is where I see that Petit has positioned himself.

Policy is also highly influenced by self-interest, which in a capitalist society is entirely rational. Self-interest is the cornerstone of the concept of the ”invisible hand” and basic price theory when applied to the commerical market. But what are the implications when it is applied to policy? Is lobbying simply part of a free market for policies, where self-interested actors compete, not in the game itself, but to change the rules of the game in their favor? The idea that those who control the economic base control the infrastructure of society is not new. From a policy perspective, is the invisible hand leading us to prosperity or is it giving us the finger?[RL2] 

Just as economist Robert Solow helped us to understand the extent of our ignorance about economic growth, so has this work by Nicolas Petit. Hopefully, it will ignite a new conversation about the role of innovation and uncertainty, not only in antitrust, but also in mainstream economic thought, all without the need for Planck’s funeral procession.