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This paper relates competition studies and views on competition policy within Austrian economics to the dynamic capabilities theory. The idea of interacting research programs in economics is used to provide the frame for reflecting on particular issues of competition, on the one hand, and (1) ignorance, (2) knowledge (including tacit knowledge), (3) rationality, (4) equilibrium, (5) innovation, (6) entrepreneurship, and (7) monopoly, on the other hand. Unlike the majority of previous studies, these issues are discussed here mainly through the lens of new institutional economics. Williamson's three-level scheme is used to explain opportunities and constraints for mutually enriching exchange of concepts between different but close approaches in economic research. This paper shows that there are important interconnections and complementarities despite significant differences in objects of study and weak mutual flows of ideas and concepts.
Unlike neoclassical economics (NCE), Austrian economics (AE) has elaborated a set of concepts that are quite akin to recent developments in strategic management theories and evolutionary approaches to firm performance. To some extent, AE is even closer to the dynamic capabilities theory (DCT) — a contemporary concept in strategic management — than some concepts within new institutional economics (NIE) and even transaction cost economics (TCE). This is true despite significant differences in the specific object of studies: the market (AE) and the firm (DCT). As they are focused on different dimensions of economic activity coordination, the scientific schools often meet “translation difficulties” that become barriers to interaction of research traditions both at the level of systemic approach (e.g., NCE, AE, NIE, TCE) and with regard to particular issues concerning economic analysis. What are the sources of the misunderstanding? Is it possible to mitigate at least a part of the problem? That is what we would like to discuss.
The interplay of ideas between AE and DCT is very fragmented and not as well sustained as between AE and NIE. Some concepts are used in both theories (e.g., tacit knowledge, innovations), and some flows of ideas are not well articulated, such as the functions of an entrepreneur. Among the rare exceptions it is worth mentioning several works by Kirsten and Nikolai Foss devoted to these issues (Foss and Foss,
The main purpose of this paper is to identify opportunities to intensify the flow of ideas between theories in order to better understand practical aspects of interactions between economic agents. This issue plays an important role in determining optimal competition policy design, in particular, and the potential engines of economic development, in general. From this perspective, the paper addresses the claim made more than 15 years ago by Oliver Williamson:“…what is missing in business strategy, but is desperately needed, is a core theory... the microanalytic, comparative institutional, economizing orientation of transaction cost economics deals with many of the key issues with which business strategy is or should be concerned... The economizing approach to strategy should both contribute to and be the beneficiary of these developments (in the new science of organization).”(
At the same time, as it will be demonstrated, AE concepts (especially related to competition issues) are very close in spirit to the analysis of dynamic capabilities and the search for sustainable competition advantages (SCA) of the firm — although there is considerable criticism of AE coming from NIE. This paper continues the line of work by Foss and Foss in interpreting the concept of competition within the AE, the interrelation between competition and ignorance, knowledge (above all, tacit), equilibrium, entrepreneurship, innovations and monopoly. Special attention will be devoted to the understanding of antitrust policy in Austrian economics in the context of antitrust law evolution and the accumulation of experience in applying its provisions.
Before proceeding it is necessary to describe the assumptions, limitations and general framework of this study.
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This article is structured as follows. The first section is devoted to the working definition of competition within the context of AE compared to other research programs and DCT. The next three sections correspond to Williamson's three-level scheme: the third section covers different aspects of
AE is a heterodox field of research that focuses on competition and its role in economic development. At the same time, this particular research program (in the Lakatosian sense; see
An additional reason to turn to the issues of competition and competition policy from the perspective of Lakatosian research programs in economics is the ongoing debate on the grounds and consequences of competition policy (Baker,
Finally, AE elaborates and develops concepts that are very akin to recent developments in strategic management theory — issues of sustainable competitive advantages (SCA) of the firm, particularly those related to dynamic capabilities (
The Austrian concept of competition and its application in economic policy relies both on notions commonly accepted in economic theory, such as market, equilibrium, profit and search for information, and on concepts more specific for AE: discovery, ignorance, entrepreneur and knowledge. However, the distinguishing feature of AE is not only the use of specific tools but also the specific understanding of the concepts that are broadly used within the framework of other research traditions. This applies both to NCE and NIE. Let us recall widely known examples. “Equilibrium” in the neoclassical vision is a situation where the parties to a transaction have no incentives to reconsider the choice made, whereas for representatives of the Austrian tradition, the main characteristic of equilibrium is taking full account of alternatives of using the available resources. Opportunity costs in the Austrian sense are subjective by definition and therefore difficult to compare interpersonally, while under the neoclassical approach opportunity costs are objectified at the level of individual choice. From this perspective we have one more argument to look at AE as a source for DCT, which actually failed to find NCE as counterparty for intellectual exchange. Another example is that according to NCE the “entrepreneur” is practically no different from the “manager” or the “owner” of resources, while in AE, it is the central actor of the economic system, with complicated relations to functions of the “owner” and the “manager” creating discrepancies even within AE.
Within the context of AE, competition (competitive order) is a process of discovery of new opportunities to use known resources, which results from the entrepreneurs’ taking advantage of their alertness edge. This definition combines two closely interrelated concepts reflecting the views of the founders of contemporary AE, Friedrich von Hayek and Ludwig von Mises — competition and entrepreneurship (Mises,
Proponents of AE see their main advantage over NCE in treating competition as a process rather than a condition or a result, both of which are static. The approach to defining competition as a process envisions the need for the strict separation of competition results from its conditions. NCE defines conditions of competition as market characteristics (in terms of the number of sellers, entry and exit barriers, product differentiation, distribution of information, market concentration indicators), and results of competition as equilibrium prices and quantities sold. At the same time, as the neoclassical approach does not qualify modeled individual choice as a
Being necessary and useful, the working singular definition of competition is, as such, totally insufficient for presenting the concept of competition in AE from the perspective not only of NIE but also of DCT. Concluding this section, let us mention that the singular definition of competition within the framework of AE implicitly contains some aspects determining the program of further presentation: the way this process is connected to knowledge and ignorance, rationality of choice and tacit knowledge, equilibrium (lack of equilibrium) and monopoly, the function of an entrepreneur and the result of its fulfillment.
The fundamental role of knowledge in AE explains the significance attributed to the use of knowledge in society by Hayek (
According to Hayek, knowledge is incomplete for every economic entity. The statement complies with the provision concerning the ignorance of actors and partially the thesis of bounded rationality within the context of NIE. The downside of the problem of using knowledge in society is the high methodological status of the concept of ignorance within the AE.
Ignorance means a decision-maker lacks knowledge of circumstances and opportunities that matter from the point of view of attaining his goals, even if that person tries to make rational (reasonable) decisions. A process of movement from ignorance to knowledge about new opportunities that enable the creation of new value is an important element of competition.
Conversely, this process is a necessary condition to provide firms’ competitiveness. However, unlike the “ignorance–knowledge” issue from the individual choice perspective, DCT in fact addresses the issue of collective actions within a firm with multi-level routines. This means the “ignorance–knowledge” individual choice is a building block for understanding collective actions on the firm level.
Changing the borderline between knowledge and ignorance for actors is an essential feature of competition. The acknowledgement of the significance of such a borderline within the context of individual behavior is a characteristic of AE, but without an accent on collective actions based on mechanisms of coordination that are alternative to the mechanisms of prices — an idea which is clearly borrowed from TCE.
The distinction between knowledge and lack of knowledge is also present in the economics of information based on maintaining the optimization logic of individual choice. However, unlike AE, in economics of information, the resources used to receive knowledge have an opportunity cost (
Thus, discovery as the conceptual core of the competitive process for AE is something between the results of systematic search, when an economic entity obtains the
A similar problem arises in connection with modeling based on the assumption of information asymmetry, which is crucial for the principal-agent literature. The principal may be unaware of the characteristics of a particular agent that are important for the former, but at the same time, according to basic agency models, there is information concerning the characteristics of the distribution of different types of agents on a certain market. A proponent of AE would agree that the principal is unaware of the intrinsic characteristics of a particular agent and of goods and services provided by this agent. However, he/she would add that the principal does not have knowledge about the distribution of agents between their different types either, or even about the very set of possible types of agents (at least
With respect to product markets, ignorance actually means the existence of opportunities to gain economic profit that remain temporarily unnoticed by participants in economic exchanges.
The concept of ignorance of the present but hidden (unperceivable but detectable as a result of the entrepreneur's actions, or exploitation of dynamic capabilities in DCT, as an expected but unspecified
It is important to emphasize that unpredictability of the future may be quite expected and apparent to the actors. However, the neoclassical model of search for information does not at all fit into the logic of AE or DCT because in the NCE an agent compares the costs of search and acquisition of information, on the one hand, and the anticipated benefit from the use of this information, on the other hand. However, these considerations hardly cover all of the relevant issues.
It may seem that the formulation of the problem of ignorance of the “Austrian individual” has been well described in terms of uncertainty in the models of individual choice, which are among the most well developed in NCE. However, this is only the first impression. The assumptions used in these models are criticized (including behavioral economics research by Kahnemann, Tversky, DellaVigna and others; see
Uncertainty in AE means that elementary events are unspecified
An actor may acknowledge that events he/she is unaware of may take place in the future. Moreover, these events might have a significant impact on opportunities to attain his/her goals. This is why the characteristics of individual behavior — in addition to rationality and ignorance — also include learning and, finally, adjustment (by incorporating recent experience in initial plans).
To draw a line: according to AE, competition is a process of moving the borderline between ignorance and knowledge, but neither the costs nor the benefits, nor the very moment of acquiring knowledge, can be evaluated
The
Rationality is a fundamental concept in economics. It establishes correspondence between an actor's goals and the means of their attainment (
The traditional concept of rationality of choice within the frames of NCE is based on the optimization technique applied in economics where subjective criteria of rational choice are not essential. From this viewpoint, rationality is instrumental. Competition might be considered as a set of conditions and as a result in conjunction with instrumental rationality. Thus, instrumentality of rationality makes redundant the attempts to disclose the nature of competition as a process, if it does not rule them out completely.
According to AE, human rationality cannot be regarded in terms of optimization because inseparable elements of the optimization task are formed
At the same time, the intensity of competition may limit the opportunities for reasoning due to an increase in opportunity cost of each section of time as a frame for decision-making. In other words, time-specificity of decisions is one source of profit that is unlike wage and interest in an “evenly rotating economy” (
At the same time, from the point of view of the
The concept of awareness and rationality plays an important role in antitrust policy. The conceptual basis of antitrust policy presumes that the market players restricting competition can anticipate the effect of their actions. Moreover, other market players are assumed to be capable of identifying the actions of competitors and counterparties and their impact on the terms of their own decisions. Therefore, other market participants can evaluate the extent of the impact of counterparties’ and competitors’ actions on the competitive environment. Evidently, this concept is completely unacceptable for AE. It may also seem ambiguous from the point of view of NIE. However, NIE, unlike AE, does not consider the battle for market players’ opportunities for rational decision-making hopelessly lost.
In this connection, the assessment of competition advocacy is relevant as a specific component of antitrust policy. The main purpose of competition advocacy is to promote ideas and values of competition in society and convincing market players that active competition benefits them compared to enforcing of competition by legal rules.
The reason for advocacy in the framework of NCE is unclear. Assuming that economic entities are capable of evaluating their potential gains from alternative versions of the market structure, expenses of competition advocacy seem to be an embezzlement of resources. Regarding NIE, competition advocacy seems quite reasonable, since informing market participants reduces enforcement costs. The idea of competition advocacy might seem to be close to AE, given that the papers by Hayek and Mises are a true hymn to the competitive order. However, AE does not support competition advocacy, albeit for different reasons than their colleagues’ abiding principles of NCE. From the perspective of AE, arguments favoring competition may only be part of a policy of manipulation but, by definition, cannot be an element of informing market participants.
The skepticism of Austrians concerns not only antitrust policy but also competition policy in general. In contrast to NCE models that proceed from the assumption that all market participants are aware of the possible gains and losses in any state of the world, AE argues that no one can know about these gains and losses, including the corresponding state agency. In this context, judgment regarding a preferential market status is not possible, nor are evaluative judgments concerning the market structure and the actions of its participants. It is very important to stress that we might find strong separation of market concentration issues from competition within the AE research tradition (
The figure of an entrepreneur in economics is perhaps one of the most ambivalent and ambiguous. It arouses the greatest level of discord among representatives of different traditions in economic research. This becomes particularly clear when comparing the concept of an entrepreneur with actors such as consumers and owners of resources. It is not accidental that standard economics textbooks seldom contain systematic presentations of the theory of entrepreneurship. This is even the case for AE, where Kirznerian concept of the entrepreneur is criticized by his colleagues for the erroneous separation of entrepreneur and owner, while other AE proponents (Rothbard, Salerno) appeal to “one-sided complementarity”. This vision might be found in von Mises's theory of entrepreneurship, which argues that an entrepreneur is always a capital owner but not every owner is an entrepreneur (
The entrepreneurial function consists in identifying such buyers and sellers (bearers of individual plans) and making a profit without violating the interests of each of the actors, which constitutes a necessary condition for voluntary exchange. However, this has a spill-over effect in the form of translation of economically important information by the entrepreneur to other market players concerning the existing opportunities to use the assets at their disposal and, correspondingly their value.
Consequently, if all opportunities are reflected in the prices, which happens in a situation of Pareto-efficient equilibrium, space for exercising the entrepreneurial function disappears, as does the possibility of generating entrepreneurial profit. In this sense, there is an insurmountable contradiction between the neoclassical model of general equilibrium and the concept of entrepreneurship in AE.
Dynamic capabilities as a source of SCA are in turn the outcome of institutional entrepreneurial activity, including organizational innovations. At the same time, as it might be supposed, dynamic capabilities providing SCA are not invariant to the particular institutional environment including the mode of enforcement of antitrust norms. That is why significant changes in the institutional environment might require changing some dynamic capabilities of the first type (generic) by using dynamic capabilities of the second type (specifically dynamic). In any case, however, these changes are costly and time consuming. Moreover, there are some grounds to doubt the substitutability of the two types of capabilities. This means that entrepreneurial activity aimed at SCA is also differentiated where two types of dynamic capabilities are concerned.
Entrepreneurs have an advantage in identifying hidden opportunities and therefore shift the system of economic exchange toward equilibrium in the sense that,
Disclosing
Specifically, imposing restrictions on selling products of a competing brand might be regarded as an institutional arrangement in the form of a vertical restraint, which allows efficiency to be raised by providing higher quality services at the same prices. However, unlike the Chicago tradition of research of nonstandard commercial practices or the tradition of NIE, which identify both negative and positive effects of this sort of restrictions, AE has not developed its own approaches. On the whole, this is explained by the generally skeptical attitude towards antitrust policy as a set of instruments for improving the market's performance — and hence, towards the need to improve its tools. What is the positioning of DCT within the context of the search of SCA taking into account capabilities related to the practices mentioned above?
For AE, the discharge of the entrepreneurial function is the driving force of economic development as well as the way to provide SCA (in DTC context). In principle, it does not raise the issue of a possible negative impact of entrepreneurship on welfare. For NCE, on the contrary, such a view of the issue has long been traditional, especially when the point is entrepreneurship under conditions of significant market power. Such difference in interpreting the role of entrepreneurship is reflected not only in the methodological status of the concepts of competition and monopoly but also in the normative component — the best policy design with respect to competition.
Following the logic of AE, competition is a process that exists only in a disequilibrium economic system in the sense that not all options for using resources are reflected in the system of prices and taken into account in economic agents’ plans. This is the case irrespective of some disputes within AE on the methodological status of the equilibrium concept (see, for example, discussions of Kirzner and Lachmann and followers related to the issue of whether the market process is inherently equilibrating — Kirzner's opinion — or whether its performance generates disequilibration).
Economic agents’ plans and expectations are only partially compatible, which becomes clear at the moment they start interacting with each other. This is why long-term equilibrium on the market of perfect competition was regarded by Austrian economists as a
The methodological status of market equilibrium in AE has an important characteristic. Equilibrium is not a starting point in explaining the functioning of the market using the method of comparative statics even from very “NCE-like’ AE of Kirzner. The result achievable with different levels of probability and proximity reduces the ignorance of market players (zero ignorance is an equilibrium correlative) (
The very discovery of this sort of opportunity is closely connected with the interests of actors, since it is their individually assessed opportunities, rather than the opportunities of society as a whole. In addition, the revision of opportunities is aimed at increasing private net benefits, thus consistently approaching the “possibilities frontier” for profitable business activity. However, such a result is possible in the case of offering more attractive conditions to partners in the market process and outdistancing one's competitors.
If equilibrium is achieved, plans and expectations are compatible, the market players are not being offered more attractive alternatives which were unnoticed before. It means that competition has stopped being an active force. It corresponds to internal contradiction in the Arrow–Debreu model recognized by Frank Hahn and stressed once again by Brian Loasby (2010, p. 1301). Since the intertemporal equilibrium is derived by collapsing the future into the present, there can be
Equilibrium accounts for the side effects and unforeseen results of interactions of entities acting in their own interests. It is impossible to plan this result due to the ignorance of the decision makers for whom the discovery of new opportunities is a surprise in the sense that none of the participants can specify the parameters of the “surprise”
Explaining the obtained results
The market conditions are changing under competition. Specifically, production (transformation and transaction) costs change connected with the restructuring of production capacities demonstrates the difference of competition as a state of affairs determined in terms of equilibrium and competition as disequilibrium. Within such a formulation of the problem, the number of market players has no significance for evaluating the intensity of competition, which is in contrast with the Harvard research tradition beginning in the middle of the XX century.
Competition defined in terms of market equilibrium is closely linked with the problems of the market structure. Paradoxical as it may seem, in this matter, AE does not criticize the neoclassical mainstream, but rather the Harvard school, which is far less connected with it. The early (Harvard) school that worked within the program “structure – conduct – performance” regarded the equilibrium characteristics as a result of a certain market structure. This particular program was the main object of AE criticism.
The modern theory of industrial organization has long stopped supporting the postulate of unilateral dependence: the market structure determines conduct and thus the characteristics of results (prices, quantity, welfare effects). Models where the market structure is being formed under the impact of decisions of its participants, including strategic interaction as it is presented within gametheoretic framework, had become much more widespread several decades ago. This particular approach is closest to the Austrian concept of competition as a process. The parameters that were qualified by the “structure – conduct – performance” research program as exogenous turn out to be the results of the actions of the market players, e.g., production costs related to the employed technologies and forms of economic organization used.
Turning to competition policy issues from the perspectives of equilibrium and SCA the following should be stressed: actions, namely antitrust enforcement, aimed at the establishment and control of economic activity parameters that are largely a result of entrepreneurial activity have a negative impact on entrepreneurship, weakening and distorting incentives. Some of these consequences are (1) the mutation of SCA, (2) the weakening value creation activity and (3) the strengthening SCA in redistribution or rent-seeking.
Therefore, competition in AE is possible only in a situation of market disequilibrium. Fixing an equilibrium is equivalent to the absence of competition. This is what hinders dialogue between AE and researchers using competition models that constitute the conceptual basis of competition policy. In these models, Nash equilibrium and similar instruments are crucial for positive analysis and normative conclusions.
The interplay of competition with other important analytical elements of AE provides a key to understanding the radical contradiction between AE and NCE on the issue of monopoly.
From the Austrian position, a market process exists as long as there is freedom of sale and purchase based on specified and protected property rights, and a market process means competition. In this context a monopoly examined in economics as a special market structure is a myth because even a monopolist in the neoclassical sense of the word encounters the need to reveal hidden opportunities that are not reflected in current prices as a means of balancing the market (
This does not mean that monopoly does not deserve Austrians’ attention. Monopoly is the opposite of competition, which is what underlies the approach to defining monopoly and to making relevant normative conclusions by the Austrian school. Competition is a process in which economic agents (entrepreneurs) offer more appealing alternatives to their counteragents, whereas the restriction of this sort of opportunity is none other than monopoly. This is why the main source of man-made monopoly is the government, which restricts the choice of alternatives by means of regulation (
However, the impossibility of legitimizing private monopoly on the final product market does not mean the impossibility of legitimizing private monopoly in principle. The distinction between the monopoly of a manufacturer as a product (service) producer and the monopoly of a manufacturer as a resource owner is of principal importance to AE. This distinction is largely manifested in normative evaluations of two types of analytical elements. The element of resource monopoly is legitimate whereas the product monopoly (naturally, on an unregulated market) is a myth. For example, this myth is close to Rothbard's skepticism towards cartels’— the most dangerous antitrust law violations — instability:“…a cartel is an inherently unstable form of operation. If the joint pooling of assets in a common cause proves in the long run to be profitable for each of the individual members of the cartel, then they will act formally to merge into one large firm. The cartel then disappears in the merger. On the other hand, if the joint action proves unprofitable for one or more members, the dissatisfied firm or firms will break away from the cartel, and, as we shall see, any such independent action almost always destroys the cartel. The cartel form, therefore, is bound to be highly evanescent and unstable.”(
Remarkably, these ideas correspond to the so-called hostile tradition in antitrust described by
Exclusive control over a resource without which production of a certain set of goods and services is impossible creates opportunities for generation of profit that is monopolistic rather than entrepreneurial. In terms of DCT it is a specific Ricardian rent rather than a Schumpeterian rent. Unlike monopolistic profit, entrepreneurial profit is unstable and transient. Gaining it requires permanent efforts aimed at identifying and creating new opportunities and combinations of resources to make the outcomes more appealing for counterparties seeking for dynamic capabilities to provide SCA within the context of value creation.
It is much more difficult to establish a dialogue with respect to natural monopolistic activity in regulated sectors. From the perspective of AE, the very concept of an economic basis for identifying a natural monopolistic activity is erroneous (
Therefore, the main specific feature of AE for establishing interrelation between competition and monopoly consists in the fact that AE sees the source of monopoly in circumstances which are
In AE we might find some sort of theorems on privately induced monopoly in contrast with the state-induced one. The key element of proof is presented by Rothbard:“Why has he [producer] been able to extract a “monopoly price” through restricting his production? Only because the demand for his services (either directly by consumers or indirectly from them through lower-order producers) is inelastic, so that a decreased production of the good and a higher price will lead to increased expenditure on his product and therefore increased income for him. Yet this inelastic demand schedule is purely the result of the voluntary demands of the consumers. If the consumers were really angry at this ‘monopolistic action’, they could easily make their demand curves elastic by boycotting the producer and/or by increasing their demands at the ‘competitive’ production level. The fact that they do not do so signifies their satisfaction with the existing state of affairs and demonstrates that they, as well as the producer, benefit from the resulting voluntary exchanges.”(
There are at least three ways to criticize this point of view from the perspectives of different approaches.
First, NCE: the monopoly price appears on the elastic segment of market demand in terms of the standard of elasticity estimates adopted.
Second, NIE: obvious problems of collective action and the free-rider problem are omitted, assuming that consumers are aware of the consequences of practices implemented by the producer.
Third, behavioral economics: it is not always clear whether the producer exploits consumers distributing part of the potential benefit in his own favor at the expense of consumers.
Normative applications of the concepts developed within AE, including the concept of competition, are one of the most important and at the same time most sensitive issues closely related to practical problems in searching for firms’ SCA. AE has always been in opposition to NCE as a research program in economics on virtually all key problems of economic policy, especially competition policy, irrespective of whether the Harvard, Chicago or post-Chicago (influenced by NIE) approach to studying competition prevailed. Normative conclusion on antitrust policy would be summarized very briefly as “abolish antitrust”.
The authors of the Austrian school, in particular, negatively assess the efficiency of antitrust policy in terms of fostering competition as a vehicle of economic development. This is partially connected with the contradiction between the fundamental concepts of the two schools and partially with a simple lack of mutual understanding. Proponents of AE believed that all designs in the development of antitrust policy measures proceed from the model of perfect competition
According to AE, antitrust policy as a system of rules (exclusions of contract freedom principle) and enforcement mechanisms is based on the erroneous interpretation of the nature of competition or on government actions distorting the competitive environment. Such evaluation of antitrust policy foundations by AE does not leave much room to discuss the differences in interpretation of directions or spheres of application of antitrust policy methods.
All of these are regarded by AE as harmful for competition. For example, a selective antitrust ban on mergers is interpreted as a restriction of entrepreneurial activity and is therefore qualified as an anticompetitive action
The ban (or even structural and behavioral remedies) on cartel agreements is evaluated likewise. Let us demonstrate Austrians’ evaluation of the ban on agreements and sanctions on their participants using a concrete example. One of the most widely known antitrust cases of the past decades is the case of the “vitamin cartel.” Eight of the world's largest manufacturers of vitamins were collectively penalized for price collusion in an amount exceeding 800 million euros.
This is why in this case there is no sufficient reason to examine the differences in the ideas of AE, for example with respect to vertical restraints, tacit collusion or merger control that could become a subject of comparison to the Harvard, Chicago and Post-Chicago approaches in the theory of IO, or the implications of these actions from the perspective of DCT.
The notion of market failures is the conceptual core of the discussion about the foundations and instruments of antitrust policy in the context of the interacting and competing research traditions.
Evidently, not only the practice but also the principles of antitrust policy may seem ambivalent. One of the most complicated methodological and practical problems is a (theoretically rather trivial) conceptual separation of the protection of competition from the protection of competitors. The thesis “Competition policy should protect competition rather than competitors” is well known among researchers and politicians. Its implementation implies that antitrust policy should not be used as a tool by groups of special interests in pursuing their goals (as an instrument of unfair competition). However, to what extent might this principle be implemented in practice? In addition to any other policy envisioning the setting of rules and enforcement mechanisms, the antitrust policy has certain distributive implications that might be interpreted (at least
According to the logic of the Austrian approach, special protection of competition by the government leads to competition restriction, i.e., the opposite result. This argument is used to draw a general conceptual conclusion that antitrust policy is not needed for rectifying the market operation.
Unlike the problem of antitrust legislation as a whole, the comparison of different schools’ conceptions of particular antitrust policy tools has a certain perspective. A comparison of AE and NIE research traditions (with respect to TCE) shows
Let us recall that the per se rule means the sufficiency of establishing conformance of activities or agreements to those prohibited by law. If such conformance is established, they are recognized as guilty of violating antitrust law. The rule of reason, on the contrary, allows the restriction of competition if such practice results in consumer benefits and if the overall effect for the business practice is positive. Drawing a demarcation line between the two rules depends on the reliability of the information on the distribution of benefits and losses and on the overall gains from the use of various forms of restricting agreements. Applying the rule of reason is justified only if we believe in the ability to evaluate the gains from the adopted commercial practice.
The problem of ignorance is expressly raised both in the frames of AE and TCE. However, Austrians avoid identifying an ideal outcome of the market process for principled reasons of its unpredictability. In contrast, the approach based on Williamson's work does not rule out identifying an ideal outcome, although it questions the possibility and necessity of taking this outcome into account while formulating policy for the real world (
Here, we might formulate some very practical implications for DCT. Firms’ SCA might depend on economic concepts that in fact stand behind some economic policy instruments’ design and their implementation. Regarding antitrust policy, it becomes a challenge to create firm-specific capabilities to minimize the risks of antitrust prosecution. The example is antitrust compliance policy. Being a part and parcel of the business model it refers to the requirements of the regulatory environment and guides interactions with antitrust authority. However, these capabilities might be not only value creating but also value (re)distributing. This is why managing antitrust risks does not necessarily mean value-creating activity by firms on the market taking into account opportunities to reach private goals using antitrust agency as a tool. These worries come directly from AE.
The practice of antitrust law enforcement, starting at least from the second half of the 20th century, relies more or less on the concepts developed by economic theory. It has been mentioned by Richard Posner:“Looking over the entire history of U.S. antitrust law, I conclude that the most powerful explanatory variable is simply the state of economic opinion. Antitrust doctrine has changed more or less in tandem with changes in economic theory, though often with a lag.”(
This is particularly visible in the United States, where the dominance of the Harvard school in the studies of competition and antitrust policy issues during the 1960s–1970s was followed first by the Chicago tradition, and later, at the turn of the 21st century, the Chicago tradition was gradually displaced by Post-Chicago concepts based on considerably wider involvement of NIE concepts. The concepts of the market, competition, and the role of antitrust policy, which are alternative to AE, underwent significant changes.
The Harvard school is considered to be the starting point for development of the contemporary competition theory inherited primarily from Joan Robinson and Edward Chamberlin in the 1930s. Within the context of the Harvard approach, major market participants were recognized as admittedly being motivated to restrict competition. The dominance of the Harvard school in interpreting the conduct of market players conforms to the dominance of the per se rule in antitrust enforcement. These ideas have been refuted based on a set of empirical tests. It was one of the key factors removing the “structure – conduct – performance” approach from the foreground of industry studies.
During the first decades of antitrust law (the beginning of the 20th century), a high market share was sometimes considered to provide a sufficient basis for the qualification of monopolistic power and for this power as being illegal. At least some court decisions (e.g., Northern Securities, Standard Oil) in the United States in the early 20th century suggest the prevalence of this approach (
In the 1970s, the Harvard approach came under severe criticism from the Chicago school. Many concepts of the Chicago school relied on two common presumptions: (1) large companies and actions traditionally qualified as restrictions of competition may lead to efficiency increases; (2) many actions viewed as tools to restrict competition (above all, vertical restraints) in reality may have no such implications. It is up to special analysis in each particular case to establish any negative consequences (rule of reason instead of per se rule). Within the framework of this particular period application of the rule of reason was obviously rapidly increasing.
The use of the Chicago school as a conceptual basis for antitrust law enforcement had two types of implications. On the one hand, particular decisions on antitrust law enforcement became more substantiated from the economic point of view. On the other hand, the deterring effect of the antitrust law became weaker due to possible lowering of the predictability of its enforcement under weak standards of economic analysis. This means that SCA probably does not include multi-level complex capabilities that provide strong compliance with antitrust law requirements. However, what requirements could be made for SCA if there was no clear content of antitrust bans and standards to prove guilt or innocence and, consequently, no clear boundary between zero sanctions and multimillion-dollar equivalent fines or even imprisonment for company officials? One possible guess is a situation-specific dynamic capability to manage business-to-business and business-to-government relations to mitigate the antitrust risks mentioned.
At the same time, it is quite indicative that despite a considerably lower level of assumed antitrust intervention, the Chicago school approach was also heavily criticized from the perspective of AE, as well as from the Harvard approach. Richard Posner and Robert Bork were severely criticized for their inconsistency to protect market institutions. From the perspective of the Austrian school, those authors’ position, specifically in the sphere of antitrust policy, contradicted their position in other fields (
From the Austrians’ point of view, even though the Chicago approach uses an explanation of the market operation that competes with the Harvard research tradition in IO, it basically stays within the framework of the same working model of individual choice, and consequently, of interactions. The most vivid example is the optimism of the Chicago school with respect to contestable markets, where the absence of entry barriers does not allow an incumbent firm to generate profit on the market even if there are no opportunities at each given moment for loss-free functioning of two or more firms on the same market (condition of costs sub-additivity).
The Post-Chicago approach seems to be even less acceptable for AE. This approach based on a new methodology in a certain sense restores the conclusions of the Harvard school — at least partially. As an example, let us recall the theory of vertical restraints. The Harvard school qualified them as a way to strengthen the producer's monopolistic power on a related market. The antitrust cases used the approach of unlawfulness of agreements restricting competition per se. The authors of the Chicago school have demonstrated that exclusive contracts cannot restrict market entry and therefore market competition. A number of later (Post-Chicago) models show that the restriction of competition by vertical restrictive contracts is not an inevitable consequence but is nevertheless quite possible under certain circumstances.
From the perspective of the Post-Chicago approach, there are many agreements and actions, the effect of which does not allow their lawfulness or unlawfulness to be presumed. An in-depth analysis of the conditions and expected consequences of the use of agreements is needed. From the perspective of the Austrian school, that approach is based on excessively optimistic attitude to obtaining and qualified use of knowledge in decision-making. This particular possibility is doubted by the Austrians. There is a conflict of interest for each party in the interplay of research programs. The reason is almost self-evident: the evaluation of opportunities to explain and predict depends crucially on the assumptions and tools implemented. This is the real challenge to overcome.
The answer to the question in the paper's headline is in fact the answer of an “informed optimist”: firms’ SCA are closely related to dynamic capabilities, which in turn are necessary conditions for success in competition as a process. This is the case because identification and exploitation of new opportunities for business is in fact another aspect of the discovery of new resources (in the DCT sense as well) and the discovery of new ways to use familiar resources. At the same time, the closeness of the fundamentals of the two theories is not sufficient for their merger according to the principle of simple complementarity: AE – market, DCT – the firm. The main obstacle is still the difference in conceptual frameworks.
The significance of competition for economic development is not disputable for AE or competing NCE and now — especially — NIE as research traditions. Evolved and exploited dynamic capabilities are another side of competition in terms of firms’ actions and interaction. There is a common understanding of the need to protect competition. However, the competition protection methods used in the context of those approaches differ significantly due to serious differences in the operational and conceptual interpretation of competition. At the same time, these methods are not invariant to content and ways to develop relevant dynamic capabilities.
According to AE, relevant information is generated and transferred precisely within the framework of competition as a process and is not available
To understand the content of competition from the perspective of AE, it is important to see the demarcation line between ignorance and knowledge, how it changes and how (or whether) differences in peoples’ alertness ensure the movement of the economic system toward equilibrium. Unexpectedness, unpredictability of particular competition results, both for politicians and for market actors themselves, are necessary conditions for skepticism of the very possibility to predict product, technological and organizational changes in detail. However, this does not mean an absence of opportunities to develop and study firm-specific capabilities to initiate and sustain these changes as a way to ensure SCA. In the world of structural uncertainty, dynamic capabilities might demonstrate advantages over capabilities that are in fact pseudo-dynamic.
Hence, there is skepticism concerning the possibility of enforcing norms to protect competition by the state, on the one hand, and skepticism regarding opportunities to explain in advance and in detail the particular content of SCA in the system of “value creation — distribution (rent-seeking)” coordinates. This skepticism is fully relevant for antitrust regulation as well. NIE, in turn, sees fewer grounds for government intervention under the pretext of restrictions of competition by market players compared to the Harvard school as the basis for applying antitrust legislation, but does not fully deny antitrust policy opportunities. This is the fundamental difference between AE and NIE regarding the possibilities of competition policy.
The comparison of AE with NCE and NIE shows the difference in the views on the limits of the permissible in the activity of the government. For some type of cases the inexpediency of government intervention is presumed. One example is block exemptions as a particular form of the rule of reason. For other cases this presumption becomes imperative. It is for the reason of much greater proximity between AE and NIE as opposed to NCE that we might expect dramatic discussions of the details of both competition and antitrust policy between the NIE and AE strands of economic thinking.
Antitrust policy is not an exception among other manifestations of government activity criticized by AE. Is this position regarding competition and antitrust policy a matter of faith or knowledge based on experience? The answer is as simple as conducting a decisive experiment (following Imre Lakatos) for the purpose of establishing truth in rivalry of different research programs. In all likelihood, from the positive theory perspective, these approaches do not compete at all, because they examine different issues. However, even if this is the case, direct contradictions in the regulatory sphere, especially in the normative context, are not only unavoidable but mostly evident.
Further discussion of the differences in the understanding of dynamic capabilities, competition, competition policy frameworks and possibilities of different research programs envisions the solution of an important methodological problem. In fact, this problem was highlighted at the very beginning of the article: a
The authors are grateful to Svetlana Avdasheva (National Research University Higher School of Economics, Moscow, Russia) for continual guidance, support and encouragement and Natalia Pavlova for helpful comments and suggestions on the organization of the text.
For general review see, for example, Caldwell and Boehm (1992); Vaughn (1994).
See also the special issue of
Some theorists undertake attempts to reconstruct what the “Austrian theory of the firm” could look like (see, for example, Langlois, 2007, 2013) without presentation of the program of the study in a systemic way. They argue that in some papers in the Austrian tradition it is possible to find ideas that could form the core of the “AE theory of a firm,” including a discussion of the role of entrepreneurial activity, development of expertise and introduction of innovation in firm growth (Penrose, 1995; Sautet, 2000).
We are speaking about the Dynamic Capabilities Theory after Brian Loasby, who in fact insists on the presence of organization creating novelty as the subject matter of that theory (Loasby, 2010, p. 1304).
See also
They might suspect that there are some opportunities, but because of the lack of specification these opportunities remain unexploited.
See, e.g., Kirzner (1997, p. 94). Such an evaluation prompts the question of whether what was said is merely a consequence of serious difficulties in translation in a broad sense of the word between competing research programs, or that contemporary models can actually be reduced to basic elements of the model of perfect competition.
The review of this case see, e.g., in: Aubert et al. (2006, p. 1242).
A critical review of the relationship between antitrust policy and market failures, and their compensation methods, is presented in Meese (2005).
Especially remediable by the state activism in any active form—regulation and “the state entrepreneurship”.
We do not analyze in detail the development of IO or the contents of discussions between different schools directly related to antitrust. This issue was examined by Schmalensee (2012) in a paper devoted to IO evolution in the 20th and early 21st centuries.