On competition policy in the "New Economy"

In a 2001 paper, Robert Pitofsky, former Commissioner of the US Federal Trade Commission, examined the challenges faced by antitrust authorities when dealing with the “New Economy”. Pitofsky identified three common characteristics of the New Economy which should be considered by competition policy: a high reliance on intellectual property, a strong focus on product innovation, and market share volatility.

Picture by Joshua Sortino, Unsplash

What is the “New Economy”?

As discussed by Pohjola (2002), the term “New Economy” first emerged during the 1990s, as many became convinced that the world economy was undergoing two fundamental structural transformations: the growing globalisation of business, and a revolution in information and communication technologies (ICT). These forces were expected to lead to a superior economic structure, which the business press described as the “New Economy”. Pitofsky (2001) focused on the ICT dimension of the “New Economy”, to which he also added the biotechnology sector.

Some key characteristics of the New Economy

Pitofsky (2001) contends that the New Economy, though not fundamentally distinct from the “old” one, often exhibits three key characteristics that competition authorities should consider:

1. Intellectual property reliance: In the New Economy, products are frequently built on innovative ideas that require significant initial investments but have low reproduction costs for individual items. To incentivise firms to make these investments, patents and copyrights are often used to prevent competitors from immediately copying the innovations. But this protection comes at the expense of weakened market competition, as innovation is safeguarded by limiting access to others.

2. Emphasis on innovation: According to Pitofsky (2001), consumers in the New Economy often benefit more when firms focus on creating the best and newest product, rather than when they solely focus on cost minimisation and quantity maximisation. In the words of the paper, “the key is not so much who can produce the most widgets at the lowest cost, but rather who can be the first to design, protect with intellectual property rights, and bring to market a new and improved widget”. As a result, economic models that solely emphasise price and quantity competition have limited applicability in the New Economy.

3. Uncertain durability of market power: the paper argues that there was a consensus at the time that market power in the New Economy would frequently be short-lived due to rapid innovation and relatively easy market entry. However, the author mentioned some concerns with this view, highlighting that network effects and high sunk costs (e.g. advertising) can often increase the barriers to entry significantly.

Conclusion

Over two decades after Pitofsky wrote his paper, it’s hard to deny the New Economy’s continued reliance on innovation and intellectual property rights. But the extent to which market power durability is more uncertain in the New Economy than elsewhere remains unclear. This is especially true considering the growing concerns among several competition authorities in recent years regarding the power of Big Tech.