Download Innovation and Competition in the Digital Economy

Innovation and Competition
in the Digital Economy
Joseph E. Stiglitz
Paris
October 1, 2007
Dramatic Changes in digital
technologies
 Lowering communication costs
– 50 percent compounded annual decline
in telecommunication costs in the 1990s
• Fiber optic glut during the Internet Bubble slashed
telecom cost
• Scanners convert data to image file - 160 pages
per minute.
• Improvements in the ability to gather,
process, and disseminate information
With dramatic implications for
economic efficiency
• Direct effects
– Efficiency with which resources get allocated
– Imperfect information as a barrier to economic
efficiency
• Indirect effects
– Competitiveness of economy
– Especially price variables
• Still large extent of information imperfection from
“qualitative” variables
Impacts even in (especially in)
developing countries
• Market imperfections (based on information
imperfections) greater
• Greater barriers to creating effective
telecommunication system prior to cellular
technologies
• Reduced “economic distance” between
developed and developing countries
• Increased access to knowledge
– What separates developed and less developed
countries is not just disparity in resources but
disparity in knowledge
• Reduced impacts of other infrastructure gaps
• Large part of basis of success of India
– Growing at 8-9% in recent years
– 5-6% for over a quarter century
• Increasing role in China’s success
– Growing at 10% for three decades
But the world is not flat…
• And in many ways is getting less flat
• Partially based on “unfair” international
rules
• Partially based on ability to take
advantage of new technologies
For perhaps the first time in history
• The possibility of global monopoly in
technologies that are at the center of the
economy
– PC operating systems
– Already demonstrated willingness to use
(abuse) market power
– has extended that power to new areas
• Internet explorer
• Media player
– And could extend it further
Key questions:
• Will competition regulation enhance or suppress
innovation?
– One view holds that unbridled competition is best way
to induce innovation
– Other view that if unbridled competition results in
market power, innovation will be suppressed
• What is best way of promoting innovation and
competition?
• What is appropriate intellectual property regime?
• Should there be standard setting policies?
Lessons from Recent History
• There are markedly different prices in different
markets
– Mexico, U.S., India
– Related more to the nature of competition in these
markets
• US has many firms, but only a few competing
• Harder to create competition than one thought
• Once competition has been broken down, hard
to restore
Fundamental problems
• R & D entails large fixed, sunk costs
• There are large network externalities
– Also associated with interfaces (applications for PC
operating systems)
– And learning
• Advantages of standards
– But market does not necessarily arrive at an efficient
standard on its own
– Market may not even arrive at any standard on its
own
Implications
• Tipping phenomenon—once firm gets critical fraction of
market share, can become dominant
• Once dominant, hard to introduce or restore competition
• Once dominant, can leverage market power into other
markets
• Ability to abuse market power enhanced by innovations
in marketing
– Bundling—hard to compete against a zero market price
– Non-linear pricing
– Especially easy to use in markets with low (zero) marginal costs
Competition and Innovation
• Monopolies have insufficient incentives to innovate
– lower scale of production
– adverse impact on prior invested capital
• Have ability to maintain monopoly position
– Schumpeter was wrong (succession of monopolies)
– Doctrine that all that is required is potential competition is wrong
• Contestability doctrine held that even with increasing returns to
scale potential competition could ensure efficient outcomes
• Contestability doctrine was shown to be wrong if there are any sunk
costs
• R & D entails sunk costs
• Ability to abuse monopoly position vitiates innovative
incentives of potential competitors
– Examples of Netscape, Realnetworks
Intellectual Property
• Only one part of society’s innovative system
– And not the most important part
• At base is basic research
• Most of which is publicly supported
• Poorly designed IP regime can reduce innovation
– Knowledge is the most important input into research
• By raising price of knowledge, reduces innovation
– IP can lead to monopolies
• Monopolies have less incentive to do research
• Monopolies can suppress other’s research
– Patent thicket increasingly viewed as barrier to innovation
• Blackberry example
IP
• Interferes with economic efficiency
– Marginal cost of using knowledge is zero
– So restricting usage is inefficient
– Worse: creates monopoly power
– Static inefficiency only justified by dynamic
gains
– But in poorly designed IPR systems dynamic
benefits may be less than static costs
• Dynamic benefits may even be negative
Lessons
• IPR creates monopoly power
• Monopoly power can easily be abused
• Need to restrict abusive practices
– IPR is “man-made”—balances benefits and costs
– Large number of dimensions (duration, scope,
restrictions, disclosure requirements)—need to adjust
to maximize social benefits
• Competition will not arise on its own
– Political pressures to allow monopolistic practices
• Need to have multiple competitive regulatory
authorities
– Not just telecom agency
• But maintaining competition may not be easy
– Structural separation may be necessary
• Difficulty in enforcing, e.g. non-discrimination regulations
• May help align incentives
– Limitations on IPR
• May actually enhance innovation
Multiple reforms in IPR
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Necessary to maintain innovation
Better enforcement of disclosure requirements
Strengthening novelty standard
Limiting scope/breadth
“liability system”—compensation for trespass
Better systems of “opposition”
Recognizing that IPR regime appropriate for
software differs from drugs, entertainment
– Especial care in promoting open source movement
Standards
• Can bring enormous benefits
• But there is a risk of settling on the wrong
standard
– And difficult to displace standard once established
– Weighing of public and private failures
• Huge rents generated by owner of pivotal
standards
– Large distributive consequences
– Attempts at excessive rent extraction give rise to
incentives for standard proliferation
Telecom: Living up to its potential
• Promoting competition—diverse products,
low prices
• Promoting innovation—one of sectors with
highest Innovation potential
• Promoting equality—limiting growth of the
digital divide
Will not happen on its own
Will require
• Strong competition policies
• Universal access policies
• Well designed intellectual property rights
PART OF BALANCED REGULATORY SYSTEM—
RECOGNIZING LIMITATIONS OF MARKETS
AND GOVERNMENT
PART OF WELL FUNCTIONING MARKET
ECONOMY (ACCESS TO FINANCE)
PART OF BALANCED INNOVATION SYSTEM
AT FOUNDATION OF
INNOVATION SYSTEM
• ADVANCED EDUCATION AND RESEARCH
PROGRAMS
• FUNDED BY GOVERNMENT AND INDUSTRY
• WITH A FOCUS ON ADDRESSING MAJOR
PROBLEMS OF ECONOMIES AND SOCIETY
– Not just maximizing profits—which may be more focused on
exploiting market power
– Markets often have too short a time horizon
• WELL SITUATED TO PUT NEW DISCOVERIES INTO
PRACTICE
– Basic research on browser supported by U.S. government
– First widely marketed application by private sector (Netscape)
– Market position stolen by Microsoft’s abusive use of control of
operating system
• In manufacturing, increases in France’s productivity per
hour has been much larger than in U.S.
• Technical proficiency in telecom will be critical for coming
decades
• U.S. has dominated in certain core programs/areas
– Question: why?
– Question: can government intervention, e.g. mandating Linux on
government computers, offset these market forces?
– Question: should government do this?
• But many European countries have established strong
positions in niche areas
• This institution and this new chair can help
ensure both the technical capacities and
the policy frameworks which will make it
more likely that France will have a
dynamic, competitive telecom sector from
which all will benefit:
– France will benefit
– But so too will the entire world.