Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Industry Disruption and Market Definition

The Gears of Industry

Horace Dediu has a recent interesting post on “What is [industry] disruption and how can it be harnessed?”  According to Horace,

The nominal definition I work with is that disruption is the “transfer of wealth in an industry from dominant incumbents to disadvantaged entrants.” It’s a convenient definition because it’s brief, it puts the emphasis on economic value and because it alludes to a reversal of fortune and the implied extraordinariness.

Horace goes on to note some nuances of the general definition, and suggests that industry disruption is common and regular.

What does this have to do with market definition?  In the standard approach, relevant antitrust markets are defined with reference to the cross-elasticities of demand and supply.  Basically, courts ask: “to which products can consumers reasonably turn as substitutes?” (cross-elasticity of demand) and “which companies can realistically substitute production and make products to compete with the products in question?” (cross-elasticity of supply).  See, e.g., Brown Shoe v. United States, 370 U.S. 294, 325 (1962) (elasticity of demand).

But these tests tend to focus on the current state of affairs.  They look to which products consumers can buy now, and which products companies can produce now (or within a short time).  Given the rapid and accelerating pace of technological change, perhaps industry disruption is not only common and regular, as Horace suggests, but actually more and more frequent.  In which case, looking at elasticities today may tell you very little about the state of the industry six or twelve months later.

In short, the monopolist or quasi-monopolist of today may be, in a few years, fighting for its life.  See this example (assuming for the sake of argument that it once had a monopoly — I’m not taking a position on that issue).  All of this may counsel in favor of caution when assessing market power in high technology industries.

As Teece and Coleman have written,

The paradigmatic nature of industrial and technological evolution, with waves of creative destruction occurring episodically, suggests an antitrust enforcement regime that is not hair trigger in its operation.  While each wave of creative destruction is by no means predictable as to timing and strength, antitrust authorities need to be cognizant of the self-corrective nature of dominance engendered by regime shifts.  This is true even when there are significant network externalities and installed base effects.  Except for the intelligent and swift, market dominance is likely to be transitory, as regime shifts dramatically lower entry costs.

David J. Teece and Mary Coleman, The Meaning of Monopoly: Antitrust Analysis in High-Technology Industries, 43 Antitrust Bull. 801, 808-09 (1998).  What was true in 1998 is probably even more true today.  As Teece and Coleman write, “the analysis of supply and demand substitution possibilities and opportunities is quite complicated in regimes of rapid technological change.  Simply analyzing the market from a static perspective will almost always lead to the identification of markets that are too narrow.”  Id. at 826.

These considerations may be one reason why the FTC’s and DOJ’s merger analysis under the new merger guidelines “need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition, although evaluation of competitive alternatives available to customers is always necessary at some point in the analysis.”  Awareness of the possibility of rapid paradigm shifts in the high-technology marketplace is important.

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