| Slide 1 |
| ||Diagnosing Monopoly Power in Markets with Rapid Technological Change (RTC Markets) |
MIT Sloan School of Management
March 8, 2007
| ||Basic Features of RTC Markets |
- (Expected) SR market power is necessary ex ante for innovation; thus expect SR market power, perhaps dominance, in RTC markets
- But to find monopoly power need durability of SR power, usually assessed via analysis of barriers to me-too entry
- In RTC markets innovative/Schumpeterian entry may quickly eliminate SR power even if me-too entry is difficult
- Vigor of dynamic competition to innovate, not price competition, is key to future performance when rapid technological change is possible
- Testimony focus is problems, not solutions:
- Ignoring the special features of RTC markets false positives,
- But exaggerating those features false negatives
| ||Three Main Topics: |
- The difficulty of predicting whether RTC market features will endure
- The fragility of market power based on network effects
- Some special problems posed by two-sided/platform/catalyst businesses
| ||Predicting the Pace of Innovation |
- If vigorous Schumpeterian competition endures – disruptive, market-stealing innovation – SR power not a great concern
- Still worry about using SR power to limit LR competition
- Innovation often comes in bursts of uncertain length, timing
- Autos: RTC until mid-1920; another burst coming?
- Direction and sources of innovation also hard to predict
- Music: Walkman wiped out after years by MP3/iPod
- Innovation markets miss the radical; sometimes useful
- Need to be thoughtfully skeptical to avoid two errors:
- Ignoring disruptive innovations under serious development
- Assuming all sexy new technologies will actually disrupt
| ||Dominance from Network Effects |
- In some RTC markets, network effects can lead to high shares, substantial SR market power
- Snapshot is consistent with vigorous Schumpeterian competition, no expected excess profits – also consistent with its absence
- SR power from network effects is especially vulnerable to innovation: large share because everyone expects a large share
- PCs wiped out Wang word processors quickly
- Esp. important & hard to predict the pace of disruptive change
- After years of talk about software as (web-based) service, Google recently launched potential threat to MS Office
| ||Basic Economics of Multi-Sided Platform Businesses |
- Platforms make money by igniting reactions between disparate customer groups; indirect network effects, Coase theorem fails
- Description of business models, not market fundamentals
- Rochet-Tirole saw common features; live research area
- A wide variety of old & new businesses are two-sided: marriage brokers, media, shopping malls, exchanges, payment cards,...
- Newly important because of software platforms + internet
- Maintaining balance among groups is key to platform strategies
- Often involves asymmetric pricing; all profit on one side
- But must think of all groups (e.g., apps writers) as customers
- Can have overlapping, single-sided, intersecting competition
| ||Assessing Monopoly Power in Multi-Sided Platform Businesses |
- Need to recognize that the business is not just sales to the profitable side: game consoles worry about games, consumers
- Need to worry about competition from different models: FM v. satellite radio, Google v. magazines, CraigsList v. newspapers
- Price-cost margin useless because of asymmetric pricing
- Using the Guidelines approach is at least tricky
- Competitors may have very different models: games v. PCs
- Raising price to A reduces demand from A, thus B, which feeds back on A; tough to get elasticities right
- Because both groups are necessary, intense competition for either one can eliminate profits even if “dominate” the other
| ||Concluding Remarks |
- Monopoly power can certainly exist in markets with rapid technological change; Section 2 should apply there
- But be careful: slowing rapid technological change is very costly
- Dangerous to assume that today’s conditions --SR power or vigor of dynamic competition – will persist; hard to predict change
- Market power based on network effects/expectations is particularly fragile if innovation is vigorous
- Platforms in RTC markets pose tough analytic problems; ignoring their special features can lead to a variety of serous errors
- Wish I could be more upbeat, but sometimes life is just hard...
| ||Suggested Readings |
D.S. Evans and R. Schmalensee, “Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries,” in J. Lerner and S. Stern, eds., Innovation Policy and the Economy, vol. 2, Cambridge: MIT Press, 2002, pp. 1-49.
_____________, “The Industrial Organization of Markets with Two-Sided Platforms,” in W.D. Collins, ed., Issues in Competition Law and Economics, forthcoming.
_____________, Catalyst Code, Boston: Harvard Business School Press, 2007.
D.S. Evans, A. Hagiu, and R. Schmalensee, Invisible Engines, Cambridge: MIT Press, 2006.
J.-C. Rochet and J. Tirole, “Two-Sided Markets: A Progress Report,” Rand Journal of Economics, 37 (2007), forthcoming.
R. Schmalensee, “Antitrust Issues in Schumpeterian Industries,” American Economic Review, 90 (May 2000), pp. 192-196.