Center for Intellectual property Forum

1. Big Tech and the Digital
Economy Keynote
Center for Intellectual Property Forum
December 8, 2020
David J. Teece
Institute for Business Innovation
UC Berkeley, CA
Berkeley Research Group Institute

2. NEED FOR NEW INTELLECTUAL FRAMEWORK
The very nature of competition has changed…
because of innovation, the internet, and Big
Data… but our intellectual frameworks,
analytic tools, and mindsets, have not.
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3. COMPETITION ECONOMISTS HAVE NOT YET
PROVIDED THE RIGHT LENS FOR UNDERSTANDING
BIG TECH… BECAUSE THE ANALYTIC TOOLS AT
HAND ARE STATIC, AND THUS ILL ADAPTED
“Innovation over the longer run will deliver very large consumer welfare
gains” yet competition authorities “routinely struggle to account for
dynamic effects”
Christine Wilson
FTC Commissioner
Sept 11, 2019
“Antitrust has historically focused on static (rather) than dynamic analysis…
for a number of reasons. First the antitrust community… both lawyer and
economists… have far greater familiarity and comfort with static analysis
rather than dynamic analysis. Third there’s a perception… that dynamic
analysis is less well developed…”
Thomas Rosch
FTC Commissioner
2010
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4. TRADITIONAL VIEW
• Competition comes from rivalry within
industries and/or from substitute products.
• Numbers of competitors and entry barriers
and other structural issues are key indicia of
competitive market structure.
• Competition drives innovation.
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5. DIGITAL ECONOMY COMPETITION
• Innovation drives competition as much as
competition drives innovation
• Ecosystems, not relevant markets, should be the
unit of initial analysis
• Within ecosystems complements compete too.
– Companies with complements and substitutes both
compete for available profits/rents, i.e., profits/rents in the
ecosystem that can be contested vertically, horizontally,
and laterally.
– Complementors can quickly morph into competitors…
perhaps it’s better to see them as competitors or at least
as potential competitors from the outset?
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6. COMPETITION FROM COMPLEMENTS:
Example One
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A FOCAL PRODUCT/MARKET COMPLEMENT
1 Apple II VisiCalc
Visicalc helped the sales of Apple II
2 IBM PC Lotus 1-2-3
Lotus 1-2-3 helped IBM, and hurt VisiCalc (and VisiCorp)
3 IBM PC Microsoft Excel
Excel knocked out Lotus 1-2-3 as well as VisiCalc, which in turn hurt
the Apple II
Example Two
A FOCAL PRODUCT/MARKET COMPLEMENT
1 Movie studios Netflix (distributor)
Netflix uses big data to enter the film production business and
compete with the studios

7. IMPLICATIONS OF DIGITAL COMPLEMENTS
FOR COMPETITION POLICY
1. Relevant product markets are no longer meaningful as
arenas for accessing competition.
2. Broader ecosystem is the better competitive arena to
study:
– Within ecosystems substitutes compete with
complements
– Entry barriers are no longer relevant… “isolating
mechanisms” is a better construct
3. Nicolas Petit’s broad spectrum competition also tells
us that competition is better assessed at the
ecosystem to ecosystem level.
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8. MOREOVER, PLATFORMS THAT DO NOT
INNOVATE WILL BE OVERTAKEN BY OTHERS
OFFERING SOMETHING BETTER
• Incumbency only gives you a seat at the table for
the next round of innovation which can come from
360°.
• Excite and Lycos lost the search engine game to
Yahoo. Then Yahoo lost out to Google.
• Absent strong dynamic capabilities, incumbents
and new entrants alike will fail.
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9. THE ABSENCE OF A FULLY OPERATIONAL DYNAMIC
COMPETITION FRAMEWORK INVITES FILLING THE
VOID WITH SHIBBOLETHS FROM THE PAST
 Some (e.g., Kahn) view Big Tech like industrial age railroads and oil
“trusts”… ignoring role of complements and broad spectrum
competition
 It’s not just about n-sided platforms… they are just one of many
features of the tech sector
 Data curating and orchestration are critical to competitive advantage
but rarely draw consideration from those that purport to understand
competitive outcomes
 Reckless focus on divesture… without an understanding of how big
data matters for competition policy as well as competitiveness
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10. RECOGNIZE THAT NEW ENTRY IS QUITE
POSSIBLE… IF YOU HAVE STRONG
DYNAMIC CAPABILITIES
• “Indirect entry” and competition from complementors
is very powerful
• New entrants can successfully target particular market
segments with differentiated offerings, thereby
disrupting/ challenging bigger players
• Size alone affords little protection:
• Workstation disrupted mainframes
• PC’s disrupted workstations
• Tablets disrupted laptops
• Successful new entrants in tech today are generally not
“me too” imitators/emulators but firms that innovate in
order to meet previously underserved customer needs
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11. SEAMLESS INTEGRATION SHOULD NOT BE ATTACKED;
IT IS AN ENABLER OF DYNAMIC COMPETITION
• Ease of use is important (to consumers) in digital
markets
• Because something is difficult to replicate it doesn’t
follow that it should be regulated
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12. THE EC PROPOSED MARKET INTERVENTIONS SEEK
TO ENHANCE COMPETITION AMONG PLATFORMS BY
MAKING DATA AVAILABLE TO POTENTIAL RIVALS
• There seems to be no considerations given to the
impact on dynamic competition e.g., how will this
impact the incentive to generate and store
information in the first place?
• There seems to be no analysis of competitive
effects… and simply an assumption of improvement
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13. WHATEVER POLICY CHANGES ARE MADE,
IT IS IMPORTANT TO ADHERE TO ELEMENTS OF
POLICY THAT PROMOTE INNOVATION AND
DYNAMIC COMPETITION
• Respect intellectual property rights
• Protect business confidential data
• Favor business conduct that keeps “me too” imitators at bay
• Incumbents ought not be required to provide a helping hand to
competitors… absent exceptional circumstances
• Price services at a full cost if duties are mandated
• Understand the nature of systemic competition from China
• Understand that business failures are often due to the lack of
strong dynamic capabilities
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14. SOME BUILDING BLOCKS FOR A
THIRD WAY FORWARD
1. The theory of complements needs to be developed further
2. Moligopoly captures broad spectrum competition amongst and
between Big Tech players.
3. Broaden the (consumer) welfare standard and insist on
long-term welfare to embrace innovation
4. Competitive outcomes can be shaped by firm-level dynamic
capabilities (requiring entrepreneurial management) as much as by
market position. The latter is often meaningless (only the paranoid and
the dynamically capable survive)
5. Antitrust should allow innovators to capture Schumpeterian
and Ricardian rents but be skeptical of practices that generate naked
monopoly rents
6. Need to develop a meaningful and operational theory of potential
competition based on capabilities… which will give merger
enforcement agencies a better chance of blocking anticompetitive
transactions and approving good ones
ABSENT AN UNDERSTANDING OF ORGANIZATION CAPABILITIES AND HOW
THEY EVOLVE, MISTAKES (BOTH TYPE I & II) WILL CONTINUE TO BE MADE
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15. FIASCOS CAUSED BY ABSENCE OF DYNAMIC
COMPETITION FRAMEWORK?
1. Facebook acquisition of Instagram (type II error?)
2. FTC case against Qualcomm (overturned by 9th
Circuit) (type I error?)
3. Alstrom – Siemens merger (type I error?)
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16. ITISIMPERATIVE FOR REGULATORS TO HARMONIZE
INDUSTRIAL POLICY, TECHNOLOGY POLICY,AND
COMPETITION POLICY
• Competitiveness (an industrial policy construct):
Competitiveness for a nation is defined as the degree to which it can, under
free and fair market conditions, produce goods and services and meet the
test of international markets while simultaneously maintaining and expanding
the real income of its citizens…close to a total welfare standard
• Competitive Markets (a competition policy construct):
Those where the competition process is functioning well and (long term)
consumer welfare is maximized.
• EU and US industrial and competition policy must be in harmony:
To deal with systemic competition from Chinese business entities. Industrial
policy and competition policy are unified in China
DYNAMIC COMPETITION CAN BE THE COMMON THREAD TO
HARMONIZE COMPETITION POLICY, INDUSTRIAL POLICY,
AND TECHNOLOGY POLICY.
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17. CONCRETE SUGGESTIONS FOR
E.C. COMMISSIONER VESTAGER
• The field of industrial economics has let her down and the
advice she is getting is sophomoric
• Recognise that it will take some time to build a sound
intellectual and policy framework which favors dynamic
competition over static
• Come to grips with an understanding of how the nature of
competition in Big Tech is different in important ways that
matter for policy. Initial focus should be on:
– Role of Big Tech itself competing with other Big Tech
– Role of complements and complementors as competitors
– Role of platforms
– Role of dynamic capabilities – management matters.
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18. EUROPE NEEDS STRONGER DYNAMIC
CAPABILITIES TO BECOME MORE
COMPETITIVE… BOTH THEN (1967) AND NOW!
“it is time for us to take stock and face the hard
truth… what threatens to crush us today is… a more
intelligent use of skills”
What Europe needs is “the ability to transform an idea
into reality through… the talent for coordinating skills
and making rigid organizations flexible” i.e., dynamic
capabilities!
Jean-Jacques Servan-Schreiber
Le Défi Américain
1967
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19. SOME REFERENCES TO
“THIRD WAY” WORK
1. Teece, David J., “Innovation, Governance, And Capabilities: Implications For Competition
Policy. A Tribute to Nobel Laureate Oliver Williamson by his Colleague and Mentee David J.
Teece,” Industrial and Corporate Change, forthcoming 2020.
2. Teece, David J., “Profiting from Innovation in the Digital Economy” Research Policy (2018).
3. Teece, David J., “Dynamic capabilities and entrepreneurial management in large
organizations: Toward a theory of the (entrepreneurial) firm” European Economic Review
(2016).
4. Teece, David J., “Next Generation Competition: New Concepts for Understanding How
Innovation Shapes Competition and Policy in the Digital Economy” Journal of Law,
Economics and Policy (Fall 2012).
5. Teece, David J., “Dynamic Competition in Antitrust Law” (with J. Gregory Sidak), Journal of
Competition Law & Economics 5:4 (December 2009), 581–631.
6. Teece, David J., “The Analysis of Market Definition and Market Power in the Context of
Rapid Innovation” (with Christopher Pleatsikas), International Journal of Industrial
Organization 19:5 (April 2001), 665–693.
7. Teece, David J., “The Meaning of Monopoly: Antitrust Analysis in High-Technology
Industries” (with Mary Coleman), The Antitrust Bulletin 43:3/4 (Fall–Winter 1998), 801–
857.
8. Teece, David J. with N. Petit “Big Tech, Big Data, and Competition Policy,” forthcoming
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