Market Power, Innovation, and Efficiency in Telecommunications: Schumpeter Reconsidered

Abstract

During the past decade, the work of the economist Joseph A. Schumpeter has experienced a revival as a framework for the design of public policies toward business. His metaphor of capitalism as a of creative destruction, or his claim that market power is conducive to innovation, has been used to rationalize less stringent antitrust enforcement and inspired the deregulation movement. Schumpeter produced an impressive and diverse body of scholarly research but did not integrate it into a comprehensive or unified theory. The absence of such a coherent representation creates the danger that isolated concepts are hastily applied without careful exploration whether the underlying model is applicable. Due to their unique economic characteristics, infrastructure industries, including energy and telecommunications, provide such a case in point. Schumpeter addressed public utility and infrastructure issues only in a few scattered passages. He was most outspoken when criticizing the wisdom of government antitrust and regulatory policies based on the static model of perfect competition, rather than on a more dynamic notion of competition. Regrettably, the vast literature on public utilities and their regulation barely responded to this challenge and continued to focus on static efficiency and equity issues while remaining largely silent with respect to innovation. This paper attempts to explore the implications of Schumpeter's work for the public regulation of telecommunications services. The paucity of his explicit writing to these issues renders my analysis an exercise in interpretation (but not exegesis). The next section reviews Schumpeter's overall research program and his perspectives on the process of economic development. His analyses are then applied to the