After Microsoft's antitrust case, patents from smaller firms in affected markets jumped from five to nine per year. But those same small firms saw profits fall sharply while larger competitors got stronger. Antitrust can spark innovation, but it hurts the smallest innovators most.
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The power of platforms, whether it's Google, Amazon, Apple, Alibaba, it's in the news almost daily. Have these platforms gotten too powerful? Do they block creativity and development of new ideas because they're so powerful? Underlying this concern is that the market dominance of platforms means less competition, and as a result, then consumers will be worse off because they have less innovative products to choose from.
The question that we are trying to address is that if we can actually reduce the power of dominant tech platforms, such as through an antitrust intervention, would we actually see more innovation in their ecosystem?
We focused on what are called platform ecosystems and complementers. A simple example is Google's Android operating system. Android is the platform. Apps that run on it are the complementaries.
The way we tried to address this question is to look at arguably the landmark intervention in big tech, which was a antitrust case against Microsoft in the early 2000s. And what we found is after this antitrust intervention, we did actually see an increase in innovation by other firms in Microsoft's ecosystem. But it was actually a bit of a mixed bag for them because many of these firms were not able to profit from those innovations. Many people remember this case in the context of the browser wars with Netscape. But we focused in on the enterprise infrastructure software industry, which is basically the back end software that large enterprises use in order to keep their IT systems up and running. So Microsoft did have a dominant central platform called the Windows Server operating system. But Microsoft wasn't equally active in all of the software markets in infrastructure software. And so we were able to use that variation to create a treated group of markets in which Microsoft was active and a control group of markets in which Microsoft was much less active. And the idea is that after the intervention, the firms in the treated group should react because one of these leading firms that was a huge threat to them is now constrained. It can't exploit its market power the way it could before. But if you are a firm in a market in which Microsoft hadn't been active prior to the intervention, then things actually shouldn't change that much for you.
So the finding was that after Microsoft was regulated, innovation by complementors in the treated group went up significantly, from about five patents per year to about nine. So antitrust did push innovation up. But we also noticed something very interesting. Most of this increased innovation came from low power firms, the firms with the least market share in the treatment group. Intriguingly, profits went down much more for the low market share firms. So the firms that saw this wide open market after antitrust and started providing the most innovative solutions, they were not compensated for their efforts. In contrast, the firms that did not innovate more, the high market share ones, they were the ones that got more efficient and at the end more profitable. You may also think that perhaps the intent of antitrust was in fact to get innovation from an entirely new set of firms, but our data do not confirm this. Contrary to what one might expect, firm entry did not increase.
The main takeaway is that antitrust intervention can actually spur innovation. The antitrust intervention created a Wild west kind of situation in which firms perceive the availability of lots of new opportunities and we're all racing to capture them. So when everyone's racing after the same opportunities at the same time, it becomes very difficult to actually make a profit. The other problem is that dominant platforms actually do provide some benefits to other firms in their ecosystem. In particular, they tend to provide development assets that can reduce initial costs when it comes to developing products for the platform. However, after the intervention in which the dominant firm is now restrained, complementers trying to develop on the platform will face some increased R and D cost as they now have to develop these assets themselves, which further contributes to the drop in profitability. Antitrust intervention actually can spur innovation in a platform ecosystem. On the other hand, the result that profitability drop for these firms suggests that regulators might want to think about the financial implications of antitrust intervention as well.
As to learn more about our research, read our paper in the strategic management journal Innovation and Profitability. Following antitrust intervention against a dominant platform, the Wild Wild West.
