Antitrust Brainstorming Board with David Teece

Below, we have provided the full transcript of the interview with Prof. David Teece, the Thomas W. Tusher Professor in Global Business at the Haas School of Business, University of California, recorded on September 3, 2021.

This interview was done as part of the Antitrust Brainstorming Board created by CPI with the support of the CCIA.

Thank you, Prof. Teece, for sharing your time for this interview with CPI.

A video of the complete interview is available HERE.

Do you think the current antitrust framework works for consumers?

David TEECE:

I think the antitrust law is actually pretty good and quite flexible. I think the problem is with antitrust economics. And it’s not necessarily the consumer welfare standard as such. I think the problem is that it’s been interpreted as a short-term consumer welfare criteria, and it should be long run. If you interpret it as being long run, then there’s room for the innovation story to come in. The fundamental problem with our antitrust economics, in my view, is that innovation economics is being squeezed out. Despite the fact that people will protest and say, “No, no, no. We of course pay attention to innovation,” they then tend to use standard micro-economics price theory, which pushes it out completely. So the challenge is to change the consumer welfare standard, to put it where it was always intended to be, which is a long term perspective and then that brings in the opportunity for bringing innovation and as the driver of competition and focusing on what is the impact of these business practices on innovation, because that’s a critical thing to focus on.

Do you approve of the shift from competition towards regulation?

TEECE:

I think it’s a huge mistake. As we know from many other industries, regulation, first of all, tends to drive out innovation. Secondly, it becomes rigid and the notion that you can regulate a fast changing industry and expect it to perform well is, in my view, not a tenable position. So, to assume this is a public utility story all over again is to make a colossal mistake in my view.

How would you ensure antitrust is enforced vigorously if no changes are made to the current antitrust system?

TEECE:

I think, on what in the United States we think of as Section 1 issues or conspiracy issues, I think a pretty good job as being done. And there’s a lot that we can be proud of. On Section 2 on monopoly issues, I think the fundamental problem all along is antitrust economics is not really focused on the foundations of firm level performance in prosperity. And there’s a constant confounding of high profits with antitrust bad behavior of one kind or another or conduct that’s not consistent with antitrust.

For me, if our enforcement agents had a better understanding of the difference between what I call Trumpeterian profits, or even Ricardian profits, and naked monopoly profits, we would be doing better enforcement and better public policy. And to me, it’s quite remarkable that we have almost a century of section 2 enforcement activity where all of these things are basically thrown into the same pot. And I think that’s where the fundamental problem is. It’s it our understanding of how firms build competitive advantage, and in particular, how technological innovation drives competition. Our understanding of that is being held up because we’ve been infatuated with a few simple models that are really not fit for purpose. I actually blame the professional classes a fair amount for not getting onto it and taking the world as it is rather than as I would like it to be for modeling purposes.

What are your thoughts regarding start-up acquisitions?

TEECE:

To me, this is a classic case of phenomena getting overblown. And it’s almost this knee jerk reaction now that every acquisition is just snuffing out the future competition. There may have been some instances where that is true, but in general, it’s not true. I think that consumers want solutions. Coming back to your first question about consumer welfare, it’s not just a matter of price and output. It’s a matter of providing integrated user-friendly solutions. And that often requires the logic platforms to bring in rifle shot innovations and new products and services that will strengthen their overall offering. A consumer focus would actually lead you to want to have a lot of these mergers.

That said, that said, what we need is a reasonably robust model of potential competition so that we can understand whether or not any of these killer acquisitions could actually result in more formidable competition if they were allowed to grow on a standalone basis.

Then once again, this is where antitrust economics has let us down. There’s almost nothing in the way of serious work on potential competition and fleshing out and understanding, which would have to be an evolutionary understanding, of how firms are likely to evolve and competition is likely to evolve. So these white spaces, if you will, these gaps in our understanding, are now causing us to take knee-jerk policy responses rather than get back to the drawing boards and try and build a better understanding of potential competition.

Is break-up the best solution for the digital economy and for consumers?

TEECE:

Break-up is an easy thing to say, but an odd thing to effectuate in a way that doesn’t have more collateral damage than benefits. So if there was a rich and robust understanding of big tech, and we had wise policy makers stepping forward with well thought through plans for divestiture, that would be one thing, but we’re not in that position. We have, I think, a dearth of deep understanding in economics and in policy with respect to how these companies have come to be successful. People like Elizabeth Warren want to kind of assume that this is just the old railroads and oil monopolies of yesterday. It’s a very different phenomena. And there are enormous integration benefits associated with using behavioral data that’s collected in one area using it in a different area so their economy’s in scope as well as scale. There’s new AI operating models that are being employed. All of this makes for a very different form of competition or a very different way for firms to succeed.

To take out a cleaver and start chopping pieces off without understanding what you’re doing, I think would be a travesty. I have no confidence that the people that are actually proposing divestiture have any idea what they’re talking about.

How do you see the role of the FTC and the DOJ in ensuring competition works for consumers?

TEECE:

Well, they clearly have important roles and I know that they’re seeking more enforcement dollars. My view, if they just spent the dollars they’ve got and focused on building and implementing a model of dynamic competition, I think we get better public policy and better enforcement decisions. They’re critical agencies, but it’s also important that they every so often go back to the drawing boards and come up with a rich and robust understanding of the issues at hand and how that changed. They’re very important, but I think they can also be misused if they’re driven by political agendas rather than by focusing on improving the economy and ensuring that long-term consumer interests are taken care of. If that’s what happens, then their proper role is being usurped.

How would you reconcile competition and competitiveness? Should antitrust reforms take into account the potential impact on proposed changes vis-à-vis China?

TEECE:

All of your questions have been very good, but that one’s particularly good in my view. For analytical convenience, we like to put competition policy off in one little box and put technology policy off in another little box and industrial policy off in another box, and never should they meet. For the analytical convenience of enforcers, that might make some sense, but we shouldn’t be doing policy for the analytical convenience of the agencies. We should be doing them in a way that is coherent and we’re not. China is, we are not. And we’re paying the price of that. So, in my view, competition policy and competitiveness, which is understanding how we build long-term competitive advantage and use that to enliven innovation in the economy, they need to be married. And there’s very little work that tries to do that.

People confuse the two concepts and the two words and prefer to keep things separate when in fact they need to be coordinated. I think there’s an opportunity to coordinate them all around what I call an innovation first agenda. If you look at competitions through a dynamic lens, you’ll get drawn to understanding how critical innovation is. Industrial policy, to me, is really all about making sure that innovation systems are robust and that there’s sufficient reward for innovation. And I think that needs to spill into trade policy as well. Putting innovation first is a way to begin to integrate these three different areas of policy action in a way that’s consistent and likely to be beneficial.

Any final comments you would like to make?

TEECE:

This relates to my initial statement that antitrust law is fairly robust and flexible. And before we start changing the law, I think we should look at the underlying economic models that we’re using and come to understand the phenomena. I’m quite certain if we do so, that inside the existing legal structures, we can do a much better job. There’s also the need for inter-agency coordination, so there’s the need for policy leadership from the White House and elsewhere to get these different aspects of competitiveness coordinated. There is something to be done at the administrative level, less to be done at the legislative level, and a lot to be done at the economic policy level.