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analysis five forces of framework
goals should be reversed.
Because of its direct effect on productivity growth, the most important goal for
society is a healthy process of dynamic improvement, which requires innovations in
products, processes, or ways of managing. If the rate of dynamic improvement is
healthy, over time this dominates static technical and allocative efficiency concerns. For
example, a faster rate of innovation in new approaches overwhelms static economies of
scale in existing approaches, particularly in an age where knowledge-based competition
is the rule.
A productivity growth standard suggests that technical (static) efficiency should be
the second most important goal, but that it must be assessed with more subtlety. While
antitrust analysis tends to focus on cost justifications, equal attention should be paid to
product or service value. Roughly speaking, productivity is price times quantity divided
by the quantity of labor or capital involved. It can be divided into two distinct
components: the prices that products command in the marketplace (which reflect value)
and the efficiency with which a unit of product can be produced. Thus, productivity is
enhanced not just by efficiency improvements, but also by improvements in product
quality, features, and services. Product variety is also an essential component of value,
giving customers more choices to better meet their particular needs.
High-value products provide the consumer with superior performance and features,
and therefore justify higher prices. With a focus on price/cost margins, however, high
prices are often seen as inherently undesirable for consumers. Higher prices should be a
danger sign in antitrust analysis only if they are not justified by rising customer value.
Limiting short-term price/cost margins or profitability is a dubious goal for antitrust.
Firm profitability is a good thing if it reflects truly superior products or significant
advantages in process technology or operating efficiency. It is a bad thing if it occurs in
the absence of a healthy rate of dynamic improvement. In a typical industry, average
price-cost margins and profitability will vary significantly among competitors, reflecting
varying levels of fundamental competitiveness.
Short-term consumer welfare measured by price, then, is a dubious goal on two
levels. First, it fails to measure true consumer welfare by ignoring product value.
Second, we care much more about the long-term trajectory of value, prices, and costs
than we do about consumer welfare in the short run or immediately after a merger.
Moreover, a productivity growth standard is entirely consistent with the language of the
main antitrust laws.
Benefits of a Productivity Growth Standard. Why is the productivity growth standard
different and important for antitrust? First, it is a positive standard that relates directly to
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competitiveness, a nation’s standard of living, and long-term consumer value, while
price/cost margins and technical efficiency are theoretically suspect. Productivity growth
is also more understandable and palatable to managers. Imagine how much more
constructive it would be for corporations and their attorneys to debate whether a merger
will boost productivity growth rather than continuing to debate the size of HHI.
Second, a productivity growth standard would shift antitrust away from a narrow
focus on static, short-term consumer welfare to a dynamic and more all-encompassing
view of competition and its benefits to consumers, firms, and society as whole. Defining
the goal of antitrust in terms of price/cost margins and profitability creates a [next page]