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analysis five forces of framework
is through innovation.4 Innovation provides products and services
2 M.E. Porter, "The Microeconomic Foundations of Economic Development," in The Global
Competitiveness Report 1998, 38 (Geneva: World Economic Forum, 1998). See also M.E. Porter,
“Attitudes, Values, Beliefs, and the Microeconomics of Prosperity,” in Culture Matters: How Values
Shape Human Progress (L.E. Harrison & S.P. Huntington eds., 2000).
3 While income is the best available measure, other things contribute to national standard of living
besides wages and returns to capital, such as the quality of health care, the absence of extreme income
inequality, and environmental quality.
4 J. Schumpeter, Capitalism, Socialism, and Democracy (2d ed. 1943); R. Solow, “Technical Change
and the Aggregate Production Function,” 39 Review of Economics and Statistics 312 (1957); R. Solow,
“A Contribution to the Theory of Economic Growth,” 70 Quarterly Journal of Economics 65 (1956);
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of ever-increasing consumer value, as well as ways of producing products more
efficiently, both of which contribute directly to productivity.
Innovation, in this broad sense, is driven by competition. While technological
innovation is the result of a variety of factors, there is no doubt that healthy competition
is an essential part. One need only review the dismal innovation record of countries
lacking strong competition to be convinced of this fact. Vigorous competition in a
supportive business environment is the only path to sustained productivity growth, and
therefore to long term economic vitality.
Productivity growth, then, is the missing, unstated link between competition and
national standard of living. This provides the soundest explanation for why antitrust must
protect competition: it is the key to a nation’s economic prosperity. Productivity growth
thinking also makes it clear that the focus of antitrust thinking should be on the long-term
trajectory of product value and price, not just current consumer welfare measured by
short-run prices. The following sections outline how the central role of productivity in
development and societal welfare can be applied to antitrust and competition policy.
II.2. Importance of Industry Competition: empirical evidence
Recent empirical findings verify the importance of competition to raising and
maintaining standard of living. This evidence squares well with my own experience.
Competition really matters, in the new economy and the old economy, and in all types of
countries.
One body of empirical evidence comes from The Global Competitiveness Report
2000, an annual study of competitiveness in 58 countries including all the OECD
countries as well as many developing countries.5 Data from the report are drawn from a
survey of more than 4,000 corporate and other leaders, including a representative sample
from each country. The survey is qualitative, but represents a large body of expert
opinion on important dimensions of economic policy, for which there are no quantitative
measures.
Figure 1 reproduces some of the statistical findings from the Report. For all three
years in which this analysis has been conducted, the effectiveness of antitrust policy6
proves to be one of the variables with the strongest positive association with the variation
in GDP per capita across countries. This holds even in the subsample of developing
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M. Abramowitz, “Resource and Output Trends in the United States since 1870,” 46 American
Economic Review 5 (1956).
5 M.E. Porter, “The Current Competitiveness Index: Measuring the Economic Foundations of
Prosperity,” in The Global Competitiveness Report 2000 (Geneva: World [next page]