Potential Competition as Process and Structure

Before the development of formal price theory in the early twentieth century, which included the invention of the theory of “perfect” competition, economists held an understanding of competition as active striving, leading to economic growth rather than to “optimality” in any static sense.  In the twentieth century, Joseph Schumpeter would be a lonely voice reiterating and amplifying the conception of competition as a dynamic process.  If competition is active and dynamic, the important form of competition is potential competition, often from sources we cannot easily foresee.  If competition is active and dynamic, the market structure we observe today, or even the market structure we imagine will prevail in the future, is a poor guide to antitrust policy.  We should focus instead on impediments, especially legal impediments, to entry, experiment, and contract.  In this light, recent proposals to impose on Internet platforms “structural separations” defined in terms of existing technological boundaries are likely to restrict not enhance potential competition – just as such separations did in the twentieth century.  Moreover, proposals to restrict platforms from diversifying, including through acquisition, are likely to mute the powerful potential competition that the large platforms represent to each other.

By Richard N. Langlois^[1]

It has long been conventional for economists to be taught the following story about the