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analysis five forces of framework
a zero-sum
game between firms and consumers. If consumers are to benefit from lower prices, firms
must earn lower profits. In contrast, a productivity growth standard raises no inevitable
trade-off. If productivity is growing, consumers can enjoy better products and/or lower
prices, companies can earn attractive returns on capital, and workers can enjoy rising
wages. A productivity growth standard, then, unites the perspectives of consumers,
workers, and companies. It embodies a positive sum rather than a zero-sum view of
competition. An approach to competition based on productivity growth will lead to
outcomes that benefit consumers far more than a shortsighted concern with static
profitability.
Finally, productivity growth addresses the reality of high-technology industries and
the so-called new economy by highlighting the fundamental importance of innovation.
While there are few true conceptual differences between the “new” and “old” economies,
the apparent mismatch between the static focus of antitrust and the rapid change in
technology-intensive industries has undermined antitrust’s legitimacy. Since innovation
is the basic driver of productivity growth, promoting and protecting it should be central.
III.2. Analysis of competition
How would the productivity standard be applied in practice? The best way to attain
maximal productivity growth in an industry is to ensure that industry competition is
healthy, since competition determines long-term productivity growth. It is possible to
measure past productivity growth in various ways, and we advocate that this become part
of antitrust analysis. However, predicting future productivity growth is more difficult.
Hence, there is a need for tools to assess the likely future health of competition, since this
will be the single most important factor in whether future gains in productivity will reach
their potential.
III.2.1. Measuring the health of industry competition: Five Forces Analysis
To measure the health of competition in practice, we agree with those who believe
that seller concentration, the number of firms in a market, and profitability are not very
good indicators.15 They capture only part of a complex phenomenon and divert analyses
15 See, e.g., Ewing, supra note 12; Harris & Smith, supra note 12; Weller, supra note 12.
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of competition to much less productive debates over where to draw relevant market
boundaries. Instead, a broader approach is necessary. One such approach with
acceptance in business practice is the “five forces” analysis of the intensity of
competition.
The Five Forces Model.16 The five forces model is a dynamic approach to analyzing
industry structure, based on five competitive forces acting in an industry or sub-industry:
threat of entry, threat of substitution, bargaining power of buyers, bargaining power of
suppliers, and rivalry among current competitors.17
This approach, with roots in industrial economics but moving beyond its narrower
interpretations, posits that competition in an industry is broader than price, and includes
product features, services, and processes. Competition is also seen as driven by many
influences. The five forces framework seeks to encompass all the important dimensions
of competition (see figure 6). It embodies the notion that competition is much broader
than just rivalry, where seller concentration (HHI) analysis is focused. Any of the five
forces can be significant in determining the health of competition, depending on the
particular industry. For example, the power of customers to push down price or pressure
improvements in service can be just as important to productivity growth [next page]