Extracted from W. Brian Arthur, "Increasing Returns and the New World of Business,"
Harvard Business Review, July-August, 1996.
What should be legal in this powerful and as yet unregulated world of increasing returns? What constitutes fair play? Should technology markets be regulated, and if so in what way? These questions have come to a head with the huge publicity generated by the US Justice Department's current antitrust case against Microsoft.
In Marshall's world, antitrust regulation is well understood. Allowing a single player to control, say, more than 35% of the silver market is tantamount to allowing monopoly pricing, and the government rightly steps in. In the increasing returns world, things are more complicated. There are arguments in favor of allowing a product or company in the web of technology to dominate a market, as well as arguments against. Consider these pros and cons:
Convenience. A locked-in product may provide a single standard of convenience. If a software company such as Microsoft allows us to double-click all the way from our computer screen straight to our bank account (by controlling all the technologies in between), this avoids a tedious balkanizing of standards, where we have to spend useless time getting into a succession of on-line connection products.
Fairness. If a product locks-in a market because it is superior, this is fair, and it would be foolish to penalize such success. If it locks-in merely because user-base was levered over from a neighboring lock-in, this is unfair.
Technology development: A locked-in product may obstruct technological advancement. If a clunker such as DOS locks up the PC market for 10 years, there is little incentive for other companies to develop alternatives. The result is impeded technological progress.
Pricing: To lock in, a product usually has been discounted, and this established low price is often hard to raise later. So monopoly pricing-of great concern in bulk processing markets-is therefore rarely a major worry.
Added to these considerations, high tech is not a commodity industry. Dominance may not so much consist in cornering a single product as in successively taking over more and more threads of the web of technology, thereby preventing other players from getting access to new, breaking markets. It would be difficult to separate out each thread and to regulate it. And of course it may be impracticable to regulate a market before it forms-before it is even fully defined.
There are no simple answers to antitrust regulation in the increasing returns world. On balance, I would favor a high degree of regulatory restraint, with two key principles:
Do not penalize success. Short term monopolization of an increasing returns market is correctly perceived as a reward or prize for innovation and risk taking. There is a temptation to single out dominant players and hit them with an antitrust suit. This reduces regulation to something like a brawl in a old-West saloon-if you see a head, hit it. Not a policy that preserves an incentive to innovate in the first place.
No head starts for the privileged. This means that as a new market opens up, such as electronic consumer banking, companies that already dominate standards, operating systems, and neighboring technologies should not be allowed a ten-mile start in the land-rush that follows. All competitors should have fair and open access to the applicable technologies and standards.
In practice, these principles would mean allowing the possibility of winner-take-all jackpots in each new sub-industry, in each new wave of technology. But each contender should have access to whatever degree possible to the same technologies, the same open standards, so that all are lined up behind the same starting line. If industry does not make such provisions voluntarily, government regulation will.