In the conception of Porter , the antitrust should be concerned, above all, with the growth of productivity, since this is the most important determinant of both the consumers' long-term welfare and the standard of living of a country. Porter notes that productivity growth is associated with innovation, which in turn is manifested through the commercialization of products and services of higher value to the consumer along with the development of more efficient modes of production.
The innovative process is greatly dependent on the presence of a strong competition in the marketplace. According to the author, this is the primary justification for the existence of an antitrust policy: to safeguard competition as an inducer of innovations that raise the productivity of the economy.
The main goal of the antitrust policy is then to encourage a dynamic process of improvement i. Regarding the implementation of antitrust policy, Porter notes that standard antitrust procedure — i. As an alternative, Porter proposes the use of the five forces analysis framework Porter, Any of the five forces internal rivalry, entry, substitute products and services, customers and suppliers can be significant in determining competition, depending on the specific industry under examination.
Equally important, for any of the five forces, the causes of competitive intensity are multidimensional, i. The multidimensional nature of rivalry among firms is important in order to understand the link between competition and productivity.
According to Porter , some forms of rivalry have a greater impact on productivity, being more valuable to society. By contrast, competition based on differentiation can generate a larger set of choices for consumers as well as more intense innovation in products and processes.
In other words, when considering productivity growth as a standard for antitrust, one should be aware of the kind of competition that is pursued within a country. This brings us to a second analytical step: examining the nature of local competition. Porter notes that even in locations where firms compete internationally, the vitality of local competition is crucial to the increasing of productivity.
The local competition has the power to create positive externalities for the firm — for example, through the stimulus for market rivalry and innovation, as well as the increased availability of skilled labor, information and resources. Accordingly, when the local rivalry is cooled down, a country suffers two effects: not only firms in the industry have less incentive to be productive, but also the entire business environment becomes less productive.
According to Porter , the appropriate tool to examine local competition is the diamond model Porter, in which six factors interact to create favorable conditions for innovation. From an antitrust perspective, both the five forces analysis and the diamond model are analytical tools used in order to answer a central question: how a merger if approved would affect productivity growth? Although Porter recognizes that the direct estimation of productivity growth is a difficult task, the relationship between competition and the long-term increase in productivity enables the development of an analytical framework divided into three stages.
First, the antitrust analyst should examine the significance of the merger or joint venture , as well as the basic conditions for productivity growth.
This involves three steps. In the second stage, the analyst must undertake a complete competitive assessment, using five forces analysis and the diamond model. The goal is to predict the effects of the merger on productivity growth. Specifically, the five forces analysis is used to measure the competition in the industry taking into account all markets and submarkets identified in the previous stage. Since a number of factors affects each force, the analyst must scrutinize each particular factor.
The starting point is to identify the base level of each factor and the direction it is moving before and after the merger increasing, decreasing, or steady. Finally, in the third stage, if it is found that there are significant adverse effects on the competition in the industry or on the local competition, one should examine the direct effect of the merger on productivity growth. The key questions are: Does the operation generate significant and verifiable benefits to facilitate productivity growth?
Are such benefits perpetual or limited to a specific instant of time? What is the probability that the gains are actually realized?
In answering these questions, the antitrust analyst can make a decision on the merger. Porter lists the advantages of using the five forces analysis for the examination of mergers and acquisitions.
According to the author, the traditional antitrust analysis is built upon a short-term, static look, other considerations being aggregated in the analysis as "adjustment arguments". The strategic analysis, in turn, is based on a multidimensional concept of competition and is not focused solely on price.
Strategic analysis also makes the precise definition of the boundaries of the relevant market dispensable, since it embodies all the major influences on competition. This perspective on antitrust found a strong supporter in Weller a , b. In advocating the application of the approach in the antitrust analysis, Weller b : 47 notes that:.
Productivity replaces efficiency, and standard of living replaces consumer welfare, as primary goals; it does not use concentration theory, HHIs, profitability, price increases and other tools of current antitrust analysis to determine the legal issue of whether or not a substantial lessening of competition is likely; it eliminates the need to determine the relevant market; it uses new empirical tools that are measurable, understandable and rigorous like the widely-used Five Forces analysis, Diamond analysis of the business environment, and the Market Share Instability Index […]".
When called upon to assess Porter's proposal, Einhorn , Baker and Salop , and Werden formulated strong counterarguments to the application of the five forces analysis and the diamond model in the traditional antitrust analysis.
According to Einhorn Porter does not consider the fact that measures of concentration as indicated in the Horizontal Merger Guidelines represent only a first-round screening process. It not only allows for the identification of "safe harbors", but also provides a first approach to the problem, so that larger operations that raise competition concerns may be investigated in more detail. Moreover, Baker and Salop note that modern economic theory does not support the idea that market concentration is useless as a guide for merger analysis.
Einhorn also argues that, contrary to that suggested by Porter , price-based competition is generally more important than productivity aspects in a significant number of industries. In addition, although the development of new products is an extremely important aspect of economic development, this is not something that can be easily foreshadowed by the courts or by experts without a considerable degree of subjectivity.
Accordingly, it is proposed that Porter fails to define the conditions necessary for a comprehensive analysis of productivity, with appropriate empirical measures and a theoretical model that relates the five forces to identifiable parameters in a given merger. A third object of criticism is the fact that the productivity-based approach disqualifies the definition of the relevant market as a fundamental aspect of antitrust analysis. Werden : 68 makes the following comment with reference to Weller b :.
Weller apparently would include [in a relevant market] distant substitutes, complements to them, products produced with similar inputs, inputs into the production of the products in question, and products produced using the products in question as inputs.
Casting the net this broadly may be useful in identifying all of the factors that may somehow affect prices or outputs, but it does not identify the locus of likely anticompetitive effects". Finally, the authors criticize the suggestion — incorporated into the second stage of Porter's analysis — to define the direction in which each factor that influences the five forces is moving before and after the merger increasing, decreasing, or steady.
Werden : 69 , for instance, argues that. On a more elementary level, the various commentators consider that Porter's contribution to the antitrust analysis is per se limited to the extent that both the antitrust and the five forces analysis seek inspiration from the same theoretical framework, namely the Industrial Organization.
Porter was successful in reversing the logic of the structure-conduct-performance paradigm, 10 providing tools for managers to understand the competitive landscape of an industry and thereby to develop strategies in order to lessen the competitive pressures.
Under this view, it is argued that Porter's contributions to antitrust may be only marginal i. In what follows, I present some new ideas that may clear the way in the search for a contribution from strategy for antitrust analysis. As will be seen, the path taken differs from that originally proposed by Porter Thinking ahead: is there a role for strategic analysis within antitrust?
Although the strategic approaches inspired by Industrial Organization notably, the five forces analysis are widespread in the corporate world, the strategic scholarship witnessed the emergence of a new strategic approach in the s, the so-called Resource-based View RBV e. According to Foss , it was only after the advent of the RBV that strategy found its current configuration: the key aspect of strategic management involves creating and sustaining a competitive advantage at the firm level, where a sustained competitive advantage is interpreted in terms of extraordinary rents obtained in equilibrium.
In contrast to the five forces analysis, the RBV casts a more microscopic look at the business agents, having as a unit of analysis the firm's resources. From the perspective of the RBV, firms control a set of productive resources which vary from company to company. A resource can be valuable in a particular industry or a particular moment in time, and may not have the same value in another industry or in a different context.
More importantly, the resource heterogeneity among firms explains the achievement of competitive advantage. The concept of heterogeneity is central because it helps explain the existence of differences in economic performance between firms that operate within the same industry. This aspect is largely neglected by strategic analysis inspired by Industrial Organization. Accordingly, Barney and Peteraf take on two assumptions when developing their strategic approaches founded on a resource-based view.
The assumptions are: i firms within an industry are heterogeneous with respect to the strategic resources they control and ii the resources do not have perfect mobility, which contributes to the perpetuation of heterogeneity for a reasonable period of time.
Considering the existence of imperfect mobility of resources, the creation and sustainability of economic rents becomes possible. Barney is primarily focused on the building of sustained competitive advantages derived from Ricardian rents. Peteraf argues that resources controlled by the firm generate a sustained competitive advantage when four cornerstones are present: i resources are heterogeneous within the industry, so that the firm can generate superior incomes Ricardian or monopoly rents ; ii the existence of ex post limits on competition, so that the rent is not dissipated by competition in the product market; iii resource mobility is imperfect, allowing the preservation of the economic rent within the firm; iv existence of ex ante limits on competition, indicating that the market of productive factors is unable to appropriate all income generated by the resources.
In what follows, I discuss how these ideas can be incorporated into the antitrust analysis. The strategic analysis inspired by the resource-based view can be of particular help in the antitrust analysis of the competition pattern in an industry.
Specifically, the RBV can shed light on competitive peculiarities that would remain hidden in a more traditional economic assessment. In order to make my argument more precise, I roughly divide the antitrust analysis of mergers and acquisitions in four sequential steps:. The analysis begins with the definition of the relevant market of the merger.
Based on this definition, the analyst proceeds in the calculation of market shares of the firms before and after the merger. The goal is to identify whether the firm resulting from the merger holds a market share sufficiently high as to make credible any possible abuse of market power. Assuming that the firm resulting from the merger presents a high market share, the analyst is supposed to examine the pattern of competition in the industry.
The goal is to determine whether the remaining agents in the market are able to compete effectively with the firm resulting from the merger. Based on the hypothesis that the pattern of competition in the industry is not enough to mitigate the abuse of market power, one must examine the efficiencies associated with the operation. The goal of this step is to compare the gains arising from the merger with the potential damage to competition indicated in the previous steps.
In its usual template, the analysis of the pattern of industry competition step iii essentially involves four aspects: the role of imports are imports an effective remedy against the exercise of market power? Specifically regarding the analysis of market rivalry, it is expected that competitors be able to absorb a significant share of the market in response to the exercise of market power by the merged firm.
The rivalry is considered not effective when competitors operate at full capacity, the expansion of the production capacity of the rival firms is not economically feasible in less than two years, the expansion of production involves high costs or, in the case of differentiated products, consumers are characterized by high brand loyalty. This way of understanding market rivalry clearly indicates the influence of Industrial Organization on the antitrust analysis.
When addressing a particular case, an antitrust analyst tries to characterize the rivalry in the relevant market. To this end, he or she assumes that firms are roughly equivalent except for the presence of differentiated products and examines the industry as a whole.
This type of approach has positive aspects, allowing, for example, the identification of the competitive pattern of the market Bertrand competition, Cournot competition, etc. Yet, considerations of individual firms and their resources are, in most cases, ignored. Even when the analyst seeks to incorporate in her analysis more subtle aspects of the firms, she finds herself at a loss since she does not have suitable analytical tools.
As a result, more detailed analyses of the firms are at risk of becoming mere anecdotal reports. It is exactly at this point that the analysis inspired by the resource-based view can contribute to antitrust analysis. In order to better understand the rivalry between firms in a market, the analyst may ask herself: Have companies in this industry sustained competitive advantages?
Resorting to the logic proposed by Peteraf , this issue unfolds in four questions. If a firm has a sustained competitive advantage, this means that it produces some level of economic rent. As previously noted, firms may have Ricardian rents or monopoly rents. On the one hand, the condition of heterogeneity between firms may be associated with the presence of superior production factors, which are limited in supply.
These factors of production are the basis of Ricardian rents: the firms that own the production factors are able to get higher profits precisely because there is a shortage in the supply of underlying valuable resources. On the other hand, the heterogeneity of firms may result from spatial competition Hotelling competition , product differentiation, barriers to mobility within the industry itself, advantages derived from size e.
These resources are the basis of monopoly rents because they allow the firm to deliberately restrict its production without all customers stopping consumption of the good or service. It is interesting to note that according to the structure-conduct-performance paradigm, if a firm gains persistently above normal profits, it is assumed that some form of market power exists in the market. Quite the reverse, the Chicago School assumes that in the absence of barriers to trade supported by the state, the higher profitability of the firm indicates higher production arrangements.
The antitrust analyst must therefore understand the origin of the superior performance of the firm. Assuming a firm has monopoly profit, a key condition must be met in order for the firm to sustain this competitive advantage.
As a matter of logic, before any firm establishes a superior position, there must be limited competition for that position; otherwise the market competition would erode any differential income. In other words, there must be ex ante limits to competition. The condition of ex ante limit to competition is analyzed within the RBV as a condition of imperfection in the factor market in such a way that competition between economic agents does not generate an excessive rise of the cost price of strategic resources.
Given the existence of market imperfections, a firm is able to acquire a resource at a lower price than the present value of the income stream associated with the resource itself. This condition ensures that the firm will be able to effectively generate a positive flow of income. In contrast, in the absence of market imperfections, firms could obtain only normal profits. The mere fact that a company earns an economic rent i. The sustainability of the competitive advantage requires that the condition of resource heterogeneity be preserved.
If heterogeneity is a phenomenon of short duration, the income is short-lived and the firm enjoys temporary competitive advantage. Thus, subsequent to the firm establishing a superior position — and thereby earning rents — there must be forces that limit competition for those rents Peteraf, In other words, the rent is only sustained when there are ex post limits to competition.
The concept of an ex post limit to competition is not restricted to the idea of barriers to entry. However, in the presence of changes in demand and innovation, sustained above average returns do not necessarily indicate the presence of barriers to entry". According to Peteraf , the RBV emphasizes two critical factors that determine the sustainability of income, namely: imperfect substitutability and imperfect imitability.
In general, the presence of substitutes reduces the income of a firm by making the demand curve of a monopolist or oligopolist more elastic. On the other hand, firms can take advantage of isolating mechanisms in order to gain protection against imitation and thereby preserve their income.
According to Rumelt , isolating mechanisms include property rights to scarce resources, information asymmetry, switching costs and buyer's search costs, reputation, and economies of scale associated with specialized assets. Barney argues that the cost disadvantage of a specific competitor to imitate a resource may be derived from three sources, beyond the legal protection provided by patents. First, the acquisition or development of a resource can be based on specific historical conditions.
In this case, the firm that owns the resource is characterized by first mover advantage or path dependence. Secondly, the imitation of a resource can be costly due to the presence of causal ambiguity between the resource and the competitive advantage — that is, managers may not fully understand the relationship between resource and economic profit.
This type of situation occurs generally when the resources that generate competitive advantage are part of the daily experience of a company and therefore are not noticed. Examples are the organizational culture of the firm and the good relationship with its suppliers. In the third and last place, the imitation of a resource held by the firm can be costly when the resource represents a socially complex phenomenon.
In this case, even though one may specify the way in which resources generate competitive advantage absence of causal ambiguity , the effective imitation of the resource may be too costly.
As an example, even assuming that we can clearly identify the organizational culture as a source of competitive advantage in a particular firm, this does not imply that a rival is able to mimic such a culture.
According to this antitrust theory, a monopolist would be unable to charge monopoly prices under the assumption that entrants can quickly and inexpensively start operations in the market. That is, entrants would incur zero sunk costs, suggesting some sort of symmetry between incumbents and potential entrants.
The RBV, in contrast, emphasizes the heterogeneity of firms arising from their particular experience. Although this argument does not completely challenge the theory of contestable markets, it suggests that the antitrust analysis must be implemented with care, taking into account the role played by the heterogeneity of the resources held by the firms. A higher income not being challenged does not mean that it is automatically appropriated by the firm. Economic profit will only be sustained if the resources are characterized by imperfect mobility which ensures that income is tied to the firm.
From the strategic point of view, resource immobility ensures that resource holders are unable to appropriate all of the rents generated within the firm.
If resources were mobile, rival firms would be able to get control of the sources of competitive advantage. At the margin, the competition between firms would cause the resource holder to capture the full economic profit. Peteraf argues that resources are imperfectly mobile when they are somewhat specialized to the specific needs of the firm Williamson, or when they are co-specialized Teece, Other resources can be imperfectly mobile simply because the transaction costs associated with its transfer are too high.
From the antitrust perspective, the important point to note is that imperfectly mobile resources remain linked to the firm and therefore available for use in the long term. Returning to the discussion on the theory of contestable markets: if the dominant position of a firm in the industry stems from a resource developed over time path dependence and, moreover, such a resource cannot be easily removed from the firm resource immobility , the barriers to entry in the industry are much higher than the traditional antitrust examination may suggest.
In general terms, the RBV teaches us that sustained competitive advantage requires the heterogeneity of the firm, the ex ante and ex post limit to competition, and imperfect mobility of resources. As soon as these conditions are met, the economic profit will be sustained. In antitrust terms, the implications are clear: if a firm is able to generate monopoly profits and simultaneously is able to sustain this profit, then antitrust intervention becomes necessary.
A much more subtle issue emerges when one takes into account that not all firms wishing to obtain monopoly profit will be successful. The RBV tells us that monopoly profit is sustained only when the conditions listed above are met. In these terms, it is possible to say that see also Fig. If the cost incurred to establish a competitive advantage is higher than the income earned, economic rationality implies that the firm does not pursue the strategy and thus there is no antitrust concern.
The same goes for the case where income is challenged by ex post competition and, simultaneously, the firm finds it difficult to appropriate the income generated. When the firm is able to appropriate the income imperfect mobility of resources , but the income is challenged by ex post competition, the competitive advantage is temporary and may be understood as an inherent part of capitalist dynamics. Finally, when resources are mobile and income is not challenged by ex post competition, two situations can happen: i the firm may not have the incentive to continue the strategy, since it fails to appropriate the income; ii the firm may be in a stable equilibrium so that there is a continuous transfer of income to resource holders.
In this case, antitrust intervention is justified, but must be selective — it may be not enough to intervene just in the product market. I present in this section some empirical evidence. The discussion outlined here should be seen as an illustration and not as a deliberate test of the application of the RBV logic to antitrust. As expected, the OFT tried to define the relevant market of the operation in its initial review of the case.
The OFT, however, faced difficulties in accurately defining a boundary for the market. On the one hand, consumers can access video content in various alternative ways. On the other hand, the OFT failed to unambiguously identify a second best option for content delivery channels for consumers to replace online DVD rental.
The OFT chose, then, to analyze the competitive closeness between Lovefilm and Amazon, and between the merged companies and alternative delivery channels. The OFT drew heavily on field research to measure the diversion ratio of consumers i. The quantitative analysis based on the field study identified the hypothesis that the merger could cause a substantial reduction of competition, giving space for the potential abuse of dominant position by the merged companies.
By analyzing the documents submitted by the parties, however, the OFT eventually refuted the hypothesis of negative effects of the merger, once it became clear that the parties consistently monitor and respond to movements of other competitors, including companies that do not operate directly in the market of online DVD rentals.
Of particular interest is the fact that the OFT was unable to clearly identify a boundary for the relevant market. The OFT argued that there is a large number of channels through which consumers can access video content, making it impossible to draw a clear boundary between them.
My basic argument is that a resource-based assessment of the case can bring new insights to this analysis. I start from the OFT own description of the channels by which consumers can access film and TV video content. The main characteristics of these alternative channels are presented in Table 1.
Table 1 Channels by which consumers can access film and TV video content. In order to assess the case, I resort to a representation of the competition space as proposed by Peteraf and Bergen — see Fig. Peteraf and Bergen introduce two constructs — market needs correspondence and capability equivalence — whose basic function is to allow the assessment of commonalities between companies.
The emphasis is on the role played by resources, which may be dissimilar in kind but similar in use or functionality. The connection of the two concepts occurs through a graphical representation see Fig. The Y-axis represents the market needs correspondence measured as yes or no , and the X-axis represents the capability equivalence measured as high or low. Companies in quadrant I are those that meet the consumer need at comparable levels of satisfaction. Peteraf and Bergen indicate that these companies are essentially those which provide vertically differentiated products i.
These companies do not meet a consumer need that matches the focal company market, nor have the resources and capabilities that allow them to do so at this point. More specifically, the online DVD rental enables consumers to watch movies without the need to leave home in order to get the content and offers the flexibility of watching according to their personal availability, over an undetermined period of time.
Aiming to offer services that can satisfy this consumer need, companies must possess strong resources and capabilities on film catalog, logistical capabilities to send movies via mail, control DVD returns and ship new DVDs , technology capabilities especially regarding the online interface with the consumer and must also possess a strong brand that encourages retention of consumers.
It is worth noting that the requirements listed above do not represent a set of resources that must necessarily be retained so that a company can compete with the online DVD rental service. In the case of downloading movies via the Internet, for example, it is plausible to assume that this type of channel represents a significant rival of online DVD rental, even if it does not make sense for the company to have a strong competence in logistics.
In this particular case, the company must have the technological expertise to enable it to deliver content i. For the purposes of I analysis therefore, it may be appropriate to consider that companies must possess strong delivery capability, given the business model selected.
One factor that distinguishes channels is consumer flexibility in watching the movie according to their own availability. The flexibility comes from the business model of each type of channel, and is directly associated with the resources that support each business model. The brick and mortar store, on the other hand, cannot allow the consumer to keep the DVD for an indefinite period. If it does so, consumers would be unable to find the DVD they wanted in the store, and this would erode the attractiveness of the store to consumers.
Alternatively, the store could hold a large stock of copies of each video, but that would incur higher stock costs in each store. As another example, it is reasonable to assume that there are technical and commercial aspects justifying the practice of pay per view channels showing a movie on a fixed schedule, leaving the consumer to plan to watch the movie at the specified time.
Once again, both the delivery model and the menu of available movies are associated with the resources that support each business model. One point to bear in mind is the fact that the resources and capabilities analyzed in the horizontal axis do not represent an exhaustive listing.
In fact, there would be little gain in doing so. This set of business models offers the consumer a greater choice set movie back catalog , besides greater flexibility and convenience compared to brick and mortar retail, PPV, broadcast TV and specialized movie channels quadrant II. Quadrant III presents business models that, despite not meeting the need for domestic consumption of movies, gather resources that make it possible to do so.
The OFT reports that there is sufficient evidence suggesting that the company Lovefilm considers all types of video content delivery channels as its competitors. In line with the discussion in the preceding section see Fig. It is interesting to note that from a resource-based perspective Fig. They can do so because they have similar resources that enable them to fulfill the same consumer need. Second, because companies in quadrant II have weak capabilities in offering flexibility to consumers, the OFT conclusion depends on the assumption of high cross elasticity of demand between the products and services offered by companies located in quadrant I and those located in quadrant II.
Finally, the OFT conclusion is founded on the assumption of low entry barriers so that companies located in quadrant III can impose competitive pressure on the companies located in quadrant I. Largely, the goal here is not to determine whether the analysis undertaken by the OFT was appropriate or not.
The objective is to show how the analysis of companies' resources can generate insights on antitrust analysis which cannot be generated from received approaches. Although I have illustrated the application of the RBV logic to antitrust, much of the previous discussion is based on a static idea of manufacturing industries.
While this fact is a clear limitation of my paper, it also invites us to push the boundaries of the discussion in new directions. In what follows, I outline two potential directions for future research. A first direction comes from the emergence of business ecosystems as a new organizational form. A business ecosystem is a network of organizations, which make possible the provision of a given product or service through both competition and cooperation.
According to Moore , p. These communities come together in a partially intentional, highly self-organizing, and even somewhat accidental manner". The key aspect is that the "traditional economic theory does not focus on business ecosystems as a distinct form of organization and does not provide conceptual templates that can be used to detect, inspect, and assess business ecosystem" Moore, , p.
However, in its heart, business ecosystems are based on core resources and capabilities, which are exploited with the purpose of producing a core product or service Moore, It means that the RBV may bring important contributions to the discussion, focusing on organizational and technological trade-offs. Kappor and Lee , for instance, show how organizational forms shape new technology investments in business ecosystems. Adner and Kaapor examine how the structure of technological interdependence affects firm performance in business ecosystems.
A second direction in the application of the RBV logic to antitrust is the analysis of the relationship between competition and innovation e. Productivity growth fostered by innovation is but one example of this, and market structures should be assessed by their ability to both deliver consumer surplus and long-run incentives to innovate.
The notion of static efficiency that underlies much of my discussion could benefit from the more dynamic analysis of antitrust and strategy as developed by Teece and coauthors e.
Another related area of investigation is the competition pattern associated to multi-sided platforms e. Privacy Copyright. Skip to main content.
Economics Faculty Journal Articles. Title Ricardian or monopoly rents? The perspective of potential entrants. Authors Joseph Shaanan , Bryant University. Comments Published by Palgrave Macmillan Ltd. Keywords rent; monopolies; markets; economics; competition. Publication Source Eastern Economic Journal. Abstract The explanation for the positive relationship between concentration and profitability is one of the most controversial topics in the field of industrial organization.
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