Monopolization and the Fading Dominant Firm

Abstract

From time to time a dominant firm, however innovative or competitive it may once have been, loses the capability advantages that brought it earlier success. This does not necessarily mean that the dominant firm has lost capabilities. If innovative outsiders’ capabilities pass the dominant firm’s, that can remove its capability advantages. This can occur when the technological or market basis of the industry is changing, or when the specific set of technologies, strategies, or business models chosen by the dominant firm are beginning to be eclipsed by innovative ideas from outside. This familiar industry situation is the fading dominant firm. Industries with a fading dominant firm need not be a problem for society if creative destruction competition offers consumers a choice between the old and the new. Consumers benefit from that increased choice. Further, as Schumpeter (1942) pointed out, consumers benefit if either creative destruction literally replaces the old with the new or if the mere threat of creative destruction gives existing dominant firm a powerful incentive to catch up to entrants in productive or innovative capabilities. That incentive to rebuild capability advantages within the dominant firm are a consumer benefit of creative destruction competition. Unfettered creative destruction competition is accordingly important to consumer welfare gains and to economic growth. Sometimes a fading dominant firm’s strategy facing the threat of creative destruction competition will be to block the new competition. The anticompetitive goal of the fading dominant firm will be to extend its existing monopoly power into the future and/or into new product markets. Just as creative destruction competition is important to consumer welfare gains and to economic growth, efforts to block creative destruction competition by a fading dominant firm deserve careful scrutiny by antitrust enforcers. In these notes, I first take up the economics of industries with a fading dominant firm. I then turn to antitrust analysis of monopolization in such industries in general. My final topic is the US and EU monopolization cases against Microsoft.