The New Industrial Organization: Ecosystem Competition

Abstract

This paper characterizes a new industrial organization framework for analyzing ecosystem formation and competition by recognizing the Schumpeterian force of creative destruction. Economists’ framework of profit maximization is replaced by a Welfare Enhancing framework (WEF)as a more pragmatic and realistic characterization of reality. Consumers are not fish in the ocean waiting to be preyed upon; they have free choice and broad lifestyle choices. The supply and demand framework is still relevant even though profit maximization in the theoretical sense that it has been technically crafted by economists may not. Firms as epistemic communities are more fitting as the behavioral assumption that can be more pragmatically applied. By using graphs and examples, three types of ecosystems are discussed, each sharing the commonality of data management as a driver for its respective ecosystem. The first two types of data management, coupled with pricing, bundling, and various industrial organization conducts, help to promote the welfare-enhancing growth of their respective ecosystems in an innocuous manner. The third type has an electrifying component resembling features of “two-sided” markets that may require Antitrust regulation. The key difference between the third and the first two types of competition is that the third type could lock in data with a specific investment of productivity less than the ideal optimal, thus reducing welfare rather than enhancing welfare.