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The Relationship between Competition and Innovation – Carl Shapiro – June 2023 OECD discussion

This presentation by Carl Shapiro, Professor at the University of California, Berkeley, was made during the discussion “The Relationship between Competition and Innovation” held at the 140th meeting of the OECD Competition Committee on 14 June 2023. More papers and presentations on the topic can be found out at oe.cd/rbci. This presentation was uploaded with the author’s consent.

The Relationship between Competition and Innovation – Carl Shapiro – June 2023 OECD discussion

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Competition and Innovation:
In Praise of Contestability and Disruption
Carl Shapiro
University of California at Berkeley
OECD Competition Committee
14 June 2023
What is Innovation in the Economy?
 Not Just Invention!
 D&R: “Development” and “Research”
 Diffusion of Technological Advances
 Insights on How to Use New Technologies
 New Business Models and Organizations
 Experimentation and Flexibility
 Rapid Growth of Winners
 Fail Fast and Try Again
 Mixture of Startups and Incumbents
 Collaboration Can Be Powerful
Carl Shapiro Slide 1
National Innovation Systems
 Private-Sector Innovation Requires Structural
Foundations → Major Role of the Public Sector
 Translation of Research from Lab to Market
 Understanding of Research Advances
 Complementary Inputs & Infrastructure
 Financing for Risky Projects and Startups
 Tolerance for a Diversity of Approaches
 Broad-Based Educational Opportunities
 Highly Skilled Workforce
 Balanced Intellectual Property Rights
 Respect for Property Rights and the Rule of Law
 Smart Regulatory Regime
Carl Shapiro Slide 2
Competition Promotes Innovation: PERIOD
 Competition Puts Firms Under Pressure to
Improve their Products and Services: Incentives!
 Notion that “Too Much Competition is Bad for
Innovation” is Both Incorrect and Dangerous
 Theory and Empirics Make this Very Clear
 Key Driver of Innovation is Contestability
 Profitable Sales Shift to Successful Innovators
 Static Measures of Market Structure: Not Informative
 Disruptive Firms are Golden
 Profitable Incumbents Will Try to Buy or Bury
 Better if They are Fearful & Forced to Innovate
Carl Shapiro Slide 3
Protecting Disruptive Entrants:
Exclusionary Conduct
 Prevent Powerful Incumbents from Engaging
in Exclusionary Conduct
 Disruptive Entrants May Be Especially Vulnerable
 Exclusion of Less-Efficient Rivals is Not Benign
 Need to Distinguish Competition on the
Merits from Exclusionary Conduct
 Compare Actual to Counterfactual Using a
Realistic Less-Restrictive Alternative – Remedy?
 Sector-Specific Regulations Can Assist Entry
 Duties to Deal Require Detailed Oversight
Carl Shapiro Slide 4
Protecting Disruptive Entrants:
Merger Enforcement
 Prevent Powerful Incumbents from Acquiring
Actual and Potential Rivals
 Even Disruptive Entrants Can Be Bought Off
 Focus on Targets that Are Competitive Threats
 Not on Targets that Offer Complements
 Be Bold in the Face of Inevitable Uncertainty
 Powerful Incumbents Often See Threats First
 Focus on How Deal Changes Innovation Incentives
 Small Chance of Major Disruption is Worth Saving
 Use Balance of Harms, Not Balance of Probabilities
Carl Shapiro Slide 5

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The Relationship between Competition and Innovation – Carl Shapiro – June 2023 OECD discussion

  • 1. Competition and Innovation: In Praise of Contestability and Disruption Carl Shapiro University of California at Berkeley OECD Competition Committee 14 June 2023
  • 2. What is Innovation in the Economy?  Not Just Invention!  D&R: “Development” and “Research”  Diffusion of Technological Advances  Insights on How to Use New Technologies  New Business Models and Organizations  Experimentation and Flexibility  Rapid Growth of Winners  Fail Fast and Try Again  Mixture of Startups and Incumbents  Collaboration Can Be Powerful Carl Shapiro Slide 1
  • 3. National Innovation Systems  Private-Sector Innovation Requires Structural Foundations → Major Role of the Public Sector  Translation of Research from Lab to Market  Understanding of Research Advances  Complementary Inputs & Infrastructure  Financing for Risky Projects and Startups  Tolerance for a Diversity of Approaches  Broad-Based Educational Opportunities  Highly Skilled Workforce  Balanced Intellectual Property Rights  Respect for Property Rights and the Rule of Law  Smart Regulatory Regime Carl Shapiro Slide 2
  • 4. Competition Promotes Innovation: PERIOD  Competition Puts Firms Under Pressure to Improve their Products and Services: Incentives!  Notion that “Too Much Competition is Bad for Innovation” is Both Incorrect and Dangerous  Theory and Empirics Make this Very Clear  Key Driver of Innovation is Contestability  Profitable Sales Shift to Successful Innovators  Static Measures of Market Structure: Not Informative  Disruptive Firms are Golden  Profitable Incumbents Will Try to Buy or Bury  Better if They are Fearful & Forced to Innovate Carl Shapiro Slide 3
  • 5. Protecting Disruptive Entrants: Exclusionary Conduct  Prevent Powerful Incumbents from Engaging in Exclusionary Conduct  Disruptive Entrants May Be Especially Vulnerable  Exclusion of Less-Efficient Rivals is Not Benign  Need to Distinguish Competition on the Merits from Exclusionary Conduct  Compare Actual to Counterfactual Using a Realistic Less-Restrictive Alternative – Remedy?  Sector-Specific Regulations Can Assist Entry  Duties to Deal Require Detailed Oversight Carl Shapiro Slide 4
  • 6. Protecting Disruptive Entrants: Merger Enforcement  Prevent Powerful Incumbents from Acquiring Actual and Potential Rivals  Even Disruptive Entrants Can Be Bought Off  Focus on Targets that Are Competitive Threats  Not on Targets that Offer Complements  Be Bold in the Face of Inevitable Uncertainty  Powerful Incumbents Often See Threats First  Focus on How Deal Changes Innovation Incentives  Small Chance of Major Disruption is Worth Saving  Use Balance of Harms, Not Balance of Probabilities Carl Shapiro Slide 5