Two Meanings of Dynamic Competition

• Aurelien Portuese, “Two Meanings of Dynamic Competition,” a conference paper in The Meaning of Competition in the Digital Age, edited by Victoria Hewson (London: IEA, December 2021).

Introduction

Today, as we celebrate the 75th anniversary of the Stafford Little Lecture F. A. Hayek delivered at Princeton University titled ‘The meaning of competition’, we have gathered an impressive group of talented speakers who have looked at Hayek’s lecture from a contemporary perspective. In his lecture Hayek defined competition as ‘a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant.’

By defining competition as a process where information is diffuse and thus conducive to an evolutionary discovery process, Hayek debunked the predominant idea of ‘perfect competition’. This textbook form of competition, Hayek argued, is neither desirable nor workable. Hayek distinguished static competition, which builds upon the theoretical model of perfect competition, from a dynamic competition that builds upon the practical reality of imperfect competition in disequilibria. Competition, Hayek summed up, ‘is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis.’

What have we learned from Hayek’s seminal lecture, which was later published in Individualism and Economic Order? Are antitrust enforcers and judges adequately accounting for competition as a dynamic process rather than a static market rivalry?

I will argue that today’s prevailing view of competition distorts Hayek’s insights in a way that undermines rather than reinforces competition. The modern approach to competition, illustrated by assertive antitrust enforcement across the Atlantic, does not refer to perfect competition. And yet, the analysis remains predominantly static. The modern approach does not ignore the role of innovation and non-price effects in competitive rivalry. And yet, the analysis fundamentally lacks a robust approach to innovation concerns. The modern approach does address competition as a process – the so-called ‘protection of the competitive process’ – to justify radical antitrust interventions and unbounded regulations. And yet, the analysis diametrically ignores the evolutionary nature of competition as a process.

Hayek distinguished between the two meanings of competition: static competition and the more appropriate dynamic competition. Seventy-five years on, we have before us two meanings of dynamic competition. The first and prevalent view of competition as a dynamic process aims at protecting competition as a process where a sufficient number of small competitors characterise an idealised market structure. In that regard, American Neo-Brandeisians and European Ordoliberals share the view of competition as a dynamic process that can only be preserved if the state intervenes to preserve the market structure and guarantee the freedoms of less competitive rivals to continue operating in the market. The second (and genuine) view of competition as a dynamic process builds upon a Hayekian–Schumpeterian nexus where competition preserves the incentives for market actors to innovate since these incentives are the engine of competition.

I now intend to demonstrate how the approach to dynamic competition as a justification for preserving the market structure distorts rather than protects competition, as mainstream voices claim. When Hayek delivered his lecture in 1946, he was a professor of economic science at the London School of Economics and had published, in 1944, his seminal book, The Road to Serfdom. To celebrate Hayek’s legacy in London about the adequate approach to the process of competition makes lots of sense. To celebrate it at the Institute of Economic Affairs is all the more relevant when we recognise the long-lasting relationship between Hayek and the Institute.

I am proud to have jointly organised the conference as the Schumpeter Project on Competition Policy of the Information Technology and Innovation Foundation. The aim of the conference is to rethink our approach to competition policy from an innovation perspective. I particularly thank Victoria Hewson for helping to organise this timely conference. And this leads me to a preliminary remark before our inquiry on how today’s notion of competition as a dynamic process is a travesty of the principles of dynamic competition.