A Primer on Competition Policy and the New Economy

Abstract

While there is general agreement among economists that the new economy has helped stimulate innovation and growth, there is a vigorous debate about when to intervene on behalf of consumers. The basic conundrum that antitrust authorities face is that scale economies in production and consumption provide an economic justification for having a single firm dominate a market.

This article characterizes the debate on antitrust and the new economy, using the Microsoft case as a key example. Antitrust policy is critical because it helps determine the rules of the road by which firms can compete and merge. Policy proposals for regulating the new economy fall loosely into two camps - those that advocate intervention in some of these markets and those that generally advocate not intervening in these markets. The interventionists focus on possible barriers to entry that could be imposed by a dominant new economy firm. The non-interventionists highlight the self-corrective nature of new economy markets, and assert that the costs of taking action on the part of government is high compared to the cost of doing nothing. Noninterventionists also question the extent to which surgical antitrust interventions are feasible or appropriate.

The paper offers six recommendations for improving policy. These include: recognizing the slow speed of antitrust policy relative to the new economy; evaluating new economy antitrust issues on a case-by-case basis; using a framework that highlights dynamic competition for new economy antitrust issues; erring on the side of caution in regulating new economy markets; reducing political rent seeking opportunities in these markets; and learning more about how these markets actually function.