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analysis five forces of framework
is an important moment to reinvigorate antitrust. Not to say that antitrust
enforcement has been lax, nor that skilled practitioners have not been able to apply the
law with great sophistication. However, recent court rulings and public debate suggest
that the foundations of antitrust theory and practice are wearing thin. The goals of
antitrust and its link to society’s goals are often not convincingly articulated. The
benefits of competition that underpin antitrust have not been made clear, and the tools for
measuring impacts on competition are frequently controversial. Too often the discussion
between business and government in antitrust proceedings concerns arcane matters such
as HHI that erodes the legitimacy of antitrust with the private sector. By relying too
heavily on narrowly conceived consumer welfare theory, antitrust analysis may be
overlooking some of the most important benefits of competition for society. Antitrust is
not living up to its full promise in deterring behavior that is not in society’s interest.
My aim here is not to offer a comprehensive treatise, settle all of the issues raised, nor
do justice to the scholarly or practitioner literature. Instead, the intention is to stimulate
further dialogue and analysis.
1 See Sections II and III.
DRAFT VERSION: 07/22/02
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II. COMPETITION, COMPETITIVENESS, AND STANDARD OF
LIVING: THE ROLE OF ANTITRUST
II.1. Competition, productivity growth, and standard of living
The stated role of antitrust policy is to promote and protect competition in the name
of consumer welfare. Yet the rationale is frequently unclear, misunderstood, or too
narrow in scope. While protecting short-run consumer welfare measured by price-cost
margins is undeniably important, the benefits of healthy competition are in fact broader
and more essential to consumers and to society. The fundamental benefit of competition
is to drive productivity growth through innovation, where innovation is defined broadly
to include not only products, but also processes and methods of management.
Productivity growth is central because it is the single most important determinant of longterm
consumer welfare and a nation’s standard of living.
The underpinnings of economic prosperity are becoming better understood as a result
of continuing research. While sound macroeconomic policies and stable political and
legal institutions represent important preconditions for prosperity and competitiveness,
they are necessary but not sufficient conditions for a prosperous economy. Prosperity is
actually generated at the microeconomic level – in the ability of firms to create valuable
goods and services productively that will support high wages and high returns to capital.2
The goal of economic development is to achieve long term, sustainable improvement
in a nation's standard of living, which can be approximated by per capita national income
(GDP per capita).3 Per capita income is determined by the productivity of a nation's
economy, where productivity is defined as the total value of the goods and services
(products) produced per unit of the nation's human, capital and physical resources. A
nation’s overall productivity is composed of the productivity of its firms, both those
involved in traded industries and those involved in purely local commerce. The crucial
issue, then, is how to create the conditions for rapid and sustained productivity growth in
a nation's firms.
Since the seminal contributions of Schumpeter (1943), Solow (1956) and Abramovitz
(1956), it is widely understood that the only means of achieving sustained productivity
growth in an economy is [next page]