Biden and Europeans Work Together to Stifle Competition and Innovation

In their misguided attempts to foster competition and innovation, US and European regulators are forging shackles for the very engines that drive technological progress. The Department of Justice, Federal Trade Commission, and state attorneys general have launched numerous antitrust cases against Big Tech companies like Alphabet, Apple, and Meta, while the European Union has introduced the Digital Markets Act (DMA) and the Digital Services Act, with the express purpose of enabling startups to compete and innovate.

These actions, despite intending to invigorate the digital domain, reflect a fundamental misunderstanding of the dynamics at play in technological competition and innovation. Should regulators have their way, we could witness the stagnation of the remarkable technological advances that have benefited consumers, investors, and workers alike.

The Biden administration and European policymakers overlook the tri-tiered nature of competition and innovation.

At the foundation, we have competition for creating novel product categories or ecosystems—think of the transformative shift from steam and kerosine to electricity or from telegraph to telephone. The introduction of the iPhone exemplifies this, as it not only superseded the Blackberry but revolutionized our digital world.

The intermediate tier is the rivalry between ecosystems—PC vs. Mac, iOS vs. Android. Each competes by offering distinct value propositions and adhering to unique platform rules that define how they deliver value to consumers and businesses. System competition leaps forward with the advent of new computing classes, which historically emerge every decade or so. A generational shift is now on the horizon.

At the edge lies competition among components within an ecosystem—app against app, device against device. Innovations here are iterative enhancements at the margin rather than revolutionary changes.

Yet, it is this marginal level that US and European regulators seem fixated on, neglecting the more fundamental levels of competition. Their interventions aim to standardize differentiated ecosystems, such as making Apple’s iOS more like Android, under the guise of promoting competition. The DMA focuses on competition and innovation “in the online platform environment,” but in doing so, it inadvertently directs entrepreneurs and investors towards providing minor tweaks within established systems rather than encouraging groundbreaking systems innovation.

The irony is that while regulators might hinder the emergence of next-generation systems or novel product categories, their initiatives do not necessarily benefit the incumbents either. In striving to homogenize competing systems, the regulators dilute the unique characteristics that cater to diverse consumer preferences, potentially diminishing the profits of companies like Apple and Alphabet by commodifying their distinct platforms.

Moreover, this regulatory approach perpetuates the myth that innovation is the exclusive domain of small entities, while large firms are cast as the antagonists of progress. History tells us otherwise. Innovation often results from the symbiosis of established corporations and nimble startups. The typewriter’s journey to mass production involved established manufacturers like Remington as well as small entrepreneurs. The development of personal computers was driven by startups like Apple and MITS, but it took IBM to make PCs a commodity. Apple engaged in systems competition against the IBM world, creating a loyal following. It then leveraged its innovative culture to revolutionize how we communicate and manage our lives. Transformative innovations often have their roots in the capacity and resources of large, established firms.

The current regulatory ideology mistakenly presumes that small firms are the sole innovators. In truth, monumental advances stem from the competition to create next-generation systems and products. Regulations biased towards innovation at the margin threaten to impede these quantum leaps, which hold the most promise for transformative economic and social value.

It is imperative that regulation be informed by a deeper, less ideological understanding of innovation dynamics. Instead of controlling the tech giants, we should be ensuring all comers have the freedom to compete in creating the future—a future that promises untold benefits not just for the technology sector, but for society as a whole.