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Static and Dynamic Competitive Innovation

 

Dynamic competition is a style of competition which relies on innovation to bring forth new products and processes and concomitant price reductions. It improves both productivity and consumer welfare.

Dynamic competition is not embraced as widely as it needs to
be in part because the overwhelming focus in economic research
is (implicitly) inside the paradigm of static competition. Indeed,
a major contribution can come from simply revealing to judges,
juries, the enforcement agencies, and legislators that most eco-
nomic analysis is static, when it should be dynamic, and as a con-
sequence innovation may well get harmed by superficial answers
derived from implicitly held static notions about desirable forms
of competition. This bias stems merely from the analytical tools
used, as most every economist recognizes the importance of inno-
vation, then usually proceeds to apply analytical approaches that
ignore it. Recognizing this state of affairs should deflate the hubris
with which many antitrust scholars approach issues. To the extent
they wield analytical tools of static competitive analysis, antitrust
analysts are quite likely to make prescriptions which harm both
innovation and competition, and sap productivity.
In order to come up with prescriptions that do more good than
harm, it is necessary to inquire about the determinants of innova-
tion, and the impact of antitrust activity on innovation. Dynamic
competition is advanced by rapid technological change. And this
is where the problem starts. The analytical framework most com-
monly used by economists stubbornly adheres to the view that
market structure and little else determines the rate of technological
change. This framework is grossly inadequate.

For instance, in merger analysis, as in many other forms of
antitrust analysis, one is required to define a market and look
at market shares. If a merger augments concentration above an
accepted threshold, it may be blocked. Merger analysis usually
proceeds this way, even though there are a growing number of
economists who are beginning to think otherwise, particularly in
differentiated product contexts.
More often than not, however, avid antitrust economists (per-
haps inadvertently), adopt the mantle of static competition.
Because of its familiarity, they (unwittingly and inappropriately)
use the apparatus of static microeconomics to analyze contexts
where innovation is important. Innovation is at best an after-
thought in static microtheory. The presence of innovation com-
plicates the analysis, destroys equilibrium, and debases the value
and utilities of the tool bags that most economists carry. This
is unsettling, and tends to be resisted by the profession. Thus,
dynamic analysis is shunned either because it isn’t known, or
if known it is feared that recognizing it will be too hostile to
well-accepted and well-practiced analytical frameworks. Compe-
tition policy advocates should not accept this state of affairs any
longer.

In today’s vernacular, dynamic competition is heavyweight com-
petition; static competition is the “lite” version. Advocates of strong
competition policy must surely favor the former. Static competi-
tion is anemic compared to dynamic competition.

Static competition reflects an intellectual framework, generally not
a state of the world. Absent innovation, (static) competition mani-
fests itself in the form of existing products offered at low prices. No
new products are introduced, and rapid price reductions driven by
innovation simply don’t exist. There’s no hurly-burly competition.
Without innovation, all firms have the same technology and the
same business models. Markets are in a comfortable equilibrium.
Nobody makes any money of course, but nor do they innovate.
Price gets squeezed down to marginal cost.

With dynamic competition, new entrants and incumbents alike
engage in new product and process development and other adjust-
ments to change. Frequent new product introductions followed by
rapid price declines are commonplace. New innovations stem from
investment in R&D, and/or the improvement and combination of
older technologies. There are continuous introductions of product
innovations, and from time to time dominant designs emerge. With
innovation, there are explosions in the number of new entrants;
but once dominant designs emerge, implosions are likely and mar-
kets become more concentrated. As with dynamic competition,
innovation and competition are tightly linked.
The model of dynamic competition recognizes that competition
is a process, and that entrepreneurs and entrepreneurial man-
agers are essential to it. Stagnation is defeated by perennial gales
of competition. Maintaining innovation depends upon the exist-
ence of entrepreneurs and institutional structures that support
innovation.

 

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