Presentation for British Institute International and Comparative Law. Competition Law Forum - November 2020

1. Sensible Tech Regulation?
How Dynamic Competition Principles
Can Be a Guide
Presentation for British Institute International and
Comparative Law
Competition Law Forum
November 26, 2020
David J. Teece
Institute for Business Innovation
UC Berkeley, CA
Berkeley Research Group Institute

2. SENSIBLE REGULATION
Requires a deep understanding of the:
1. Conduct and structures that are
problematic
2. Regulatory tools that are available
3. The limits of those tools
2

3. THE BIG TECH ISSUES
1. Allegations of the misuse of market power
2. Allegations of impairment of privacy
3. Allegations of content/media control
(free speech)
4. Other
My presentation will focus on competition
policy issues only, i.e., point 1.
3

4. WITH RESPECT TO COMPETITION
POLICY:
• We must understand the economics of todays Big Tech… it’s quite
different from yesterday’s (pre 2000) “Big Tech” (e.g. IBM, Intel,
Microsoft, Texas Instruments).
• Competition policy must favor dynamic competition, not static
competition, if it is to do more harm than good.
• There is an opportunity and the necessity to integrate competition
policy, technology policy, and industrial policy. Sensible regulation
requires harmonious regulation which also takes global realities
(e.g., rise of China) into account.
4

5. REGULATION SHOULD ADVANCE
DYNAMIC COMPETITION
“competition from the new commodity, the new technology, the new source
of supply, the new type of organization— competition which commands a
decisive cost or quality advantage and which strikes not at the margins of
the profits and the output of existing firms, but at their foundations and their
very lives.”
Joseph Schumpeter
1942
Implications
1. Static competition is “weak tea” compared to dynamic competition…
innovation is the turbocharger if not the engine of competition.
2. Innovation drives competition (perhaps more powerfully than
competition drives innovation).
3. The two way causation is absent from competition policy frameworks
in the EU and the US… and will likely lead to policy error unless
corrected
5

6. REGULATION SHOULD AVOID THE “NIRVANA FALLACY”
(H. DEMSETZ, UCLA) AND ADAPT A
COMPARATIVE INSTITUTIONAL APPROACH
(H. DEMSETZ, O.E. WILLIAMSON)
• Positing perfection on the part of institutions to solve problems
is unrealistic (H. Demsetz, UCLA)
• The status quo may not be ideal; but can it be bettered?
• Berkeley’s Nobel Laureate Oliver Williamson joined Harold
Demsetz in arguing for a comparative institutional approach…
ask whether the proposed new rules work better than the status
quo, not whether the status quo is perfect.
• The relevant choice is not between an ideal (theoretical) norm
and existing imperfect institutional arrangements.
• Classical economist Adam Smith (1776) advised us to be aware
of unintended consequences.
6

7. COMPETITION POLICY HAS NOT YET PROVIDED THE
RIGHT LENS FOR UNDERSTANDING BIG TECH
BECAUSE THE ANALYTIC TOOLS AT HAND ARE
STATIC, AND THUS ILL ADAPTED
“Innovation over the longer run will deliver very large consumer welfare
gains” yet competition authorities “routinely struggle to account for
dynamic effects”
Christine Wilson
FTC Commissioner
Sept 11, 2019
“Antitrust has historically focused on static (rather) than dynamic analysis…
for a number of reasons. First the antitrust community… both lawyer and
economists… have far greater familiarity and comfort with static analysis
rather than dynamic analysis. Third there’s a perception… that dynamic
analysis is less well developed…”
Thomas Rosch
FTC Commissioner
2010
7

8. MANY POLICY RECOMMENDATIONS CURRENTLY
BEING ADVANCED FAIL TO UNDERSTAND
COMPETITION IN THE DIGITAL ECONOMY
Key Features of Big Tech Competition:
• Mainstream policy analysts see competition driving innovation;
yet innovation is the primary driver of competition
• Neo Brandeisians agree that innovation matters, but attribute
innovation to new entrants, not Big Tech firms themselves
• Neither recognize the broad spectrum nature of Big Tech competition –
Moligopoly (N. Petit)
• Neither recognizes that “management matters,” and that firm level
dynamic capabilities are a driver of both innovation and competition
• Few analysts recognize that big data is different, and data
orchestration is a key managerial asset.
8

9. DESIGNING SENSIBLE REGULATION REQUITES
FIT-FOR-PURPOSE ANALYTIC FRAMEWORKS
Neo Brandeisians don’t have an analytic framework, and don’t
seem to care about innovation… unless it comes from small firms
and new entrants.
Mainstream competition policy economists have at best an
extremely shallow claim to be masters of innovation economics
(writ large).
While platforms are coming to be understood, the economics of
Big Data is not well understood.
Mainstream economists have frameworks; impaired by:
• Chicago and post-Chicago static equilibrium approaches
• what Nobel Laureate George Akerlof calls the “hardness
police” who have too much sway. Silly but elegant static
models, both diagrammatic and mathematical, deflect
attention from innovation and are not only tolerated but
admired
9

10. APPLYING NOBEL ECONOMIST GEORGE
AKERLOF’S TRADE-OFF MODEL:
Source: Akerlof, “Sins of Omission in the Practice of
Hardness,” Journal of Economic Literature, 2020. Here
hardness means formal models, not difficulty.
10

11. THE ABSENCE OF A FULLY OPERATIONAL DYNAMIC
COMPETITION FRAMEWORK INVITES FILLING THE
VOID WITH SHIBBOLETHS FROM THE PAST
 Some (e.g., Kahn) view tech trusts like industrial age railroads and
oil “trusts”
 Reckless focus on divesture… without an understanding of how big
data matters for competition policy as well as competitiveness
 It’s not just about n-sided platforms… they are just one of many
features of the tech sector
 Data curating and orchestration are critical to competitive advantage
but rarely draw consideration from those that purport to understand
competitive outcomes
11

12. FIASCOS CAUSED BY ABSENCE OF
DYNAMIC COMPETITION FRAMEWORK?
1. Facebook acquisition of Instagram
(type II error?)
2. FTC case against Qualcomm (overturned
by 9th Circuit) (type I error?)
3. Alstrom – Siemens merger (type I error?)
12

13. RECOGNIZE THAT NEW ENTRY IS POSSIBLE
• New entrants can successfully target particular market
segments with differentiated offerings, thereby
disrupting/ challenging bigger players
• Size alone affords little protection:
• Workstation disrupted mainframes
• PC’s disrupted workstations
• Tablets disrupted laptops
• Successful new entrants in tech today are generally not
“me too” imitators/emulators but firms that innovate in
order to meet previously underserved customer needs
• Innovation is almost always the weapon new entrants
need and use
• Absence of new entry often reflects on absence of
innovation
• “Indirect entry” is very powerful
13

14. PLATFORMS THAT DO NOT INNOVATE WILL
BE OVERTAKEN BY OTHERS OFFERING
SOMETHING BETTER
• Excite and Lycos lost the search engine game to
Yahoo. Then Yahoo lost out to Google.
• Incumbency only gives you a seat at the table for
the next round of innovation.
• Absent strong dynamic capabilities, incumbents
and new entrants alike will fail.
14

15. WHATEVER POLICY CHANGES ARE MADE,
IT IS IMPORTANT TO ADHERE TO ELEMENTS OF
POLICY THAT PROMOTE INNOVATION AND
DYNAMIC COMPETITION
• Respect property rights
• Protect business confidential data
• Favor business conduct that keeps “me too” imitators at bay
• Incumbents ought not be required to provide a helping hand to
competitors… absent exceptional circumstances
• Price services at a full cost if duties are mandated
• Understand the nature of systemic competition from China
15

16. THE EC PROPOSED MARKET INTERVENTIONS SEEK
TO ENHANCE COMPETITION AMONG PLATFORMS BY
MAKING DATA AVAILABLE TO POTENTIAL RIVALS
• There seems to be no considerations given to the
impact on dynamic competition e.g., how will this
impact the incentive to generate and store
information in the first place?
• There seems to be no analysis of competitive
effects… and simply an assumption of improvement
16

17. SEAMLESS INTEGRATION SHOULD NOT BE ATTACKED;
IT IS AN ENABLER OF DYNAMIC COMPETITION
• Ease of use is important (to consumers) in digital
markets
• Because something is difficult to replicate it doesn’t
follow that it should be regulated
17

18. REGULATORY PROHIBITORS SHOULD BE AVOIDED;
REBUTTABLE PRESUMPTIONS ARE A BETTER WAY
TO REGULATE, AND THEN ONLY IF REGULATION IS
A POLITICAL NECESSITY
• Particularly true since the issues are under
researched
• Because the ignorance quotient in policy making is
high…as it often is when markets are changing
rapidly… the probability of policy error is high.
• Many proposals are sophomoric
18

19. BIG TECH NEEDS TO BEHAVE TO:
• Recontracting should be frowned upon
 Platforms that make guarantees (to developers) of
access should honor these commitments
• Big Tech M&A activity should be scrutinized from a
dynamic competition perspective
• Burden shifting… at least until aging competence
improves… is a possible way through.
19

20. ITISIMPERATIVE FOR REGULATORS TO HARMONIZE
INDUSTRIAL POLICY, TECHNOLOGY POLICY,AND
COMPETITION POLICY
• Competitiveness (an industrial policy construct):
Competitiveness for a nation is defined as the degree to which it can, under
free and fair market conditions, produce goods and services and meet the
test of international markets while simultaneously maintaining and expanding
the real income of its citizens…close to a total welfare standard
• Competitive Markets (a competition policy construct):
Those where the competition process is functioning well and (long term)
consumer welfare is maximized.
• EU and US industrial and competition policy must be in harmony:
To deal with systemic competition from Chinese business entities. Industrial
policy and competition policy are unified in China
DYNAMIC COMPETITION CAN BE THE COMMON THREAD TO HARMONIZE
COMPETITION POLICY, INDUSTRIAL POLICY, AND TECHNOLOGY POLICY.
20

21. SOME BUILDING BLOCKS FOR A THIRD
WAY FORWARD
1. Moligopoly captures broad spectrum competition amongst and
between Big Tech players.
2. Broaden the (consumer) welfare standard and insist on long-
term welfare to embrace innovation
3. Competitive outcomes can be shaped by firm-level dynamic
capabilities (requiring entrepreneurial management) as much as
by market position. The latter is often meaningless (only the
paranoid and the dynamically capable survive)
4. Antitrust should allow innovators to capture Schumpeterian and
Ricardian rents but be skeptical of practices that generate naked
monopoly rents
5. Need to develop a meaningful and operational theory of potential
competition based on capabilities… which will give merger
enforcement agencies a better chance of blocking anticompetitive
transactions and approving good ones
6. The theory of complements needs to be developed further
ABSENT AN UNDERSTANDING OF ORGANIZATION CAPABILITIES AND HOW
THEY EVOLVE, MISTAKES (BOTH TYPE I & II) WILL CONTINUE TO BE MADE
21

22. THERE IS A NEED TO BRING ALL HANDS ON DECK
TO MAKE THE DYNAMIC COMPETITION
FRAMEWORK MORE OPERATIONAL
We must employ the extensive research in
technology strategy and policy and in
strategic management to operationalize new
regulatory frameworks
22