Disruptive Innovation and Competition Policy Enforcement
Disruptive innovation, according to business literature, occurs when an innovative product is brought to a market, such as meets the basic requirements of the lower-end of an established value network and also offers added value outside of that value network. That product wins over consumers and progressively takes over the established market, displacing the existing value network in so doing. By now, disruptive innovation is a frequent entry strategy, and it is usually beneficial for welfare.
Despite an ever growing literature on innovation and competition policy, the latter is not well placed to deal with disruptive innovation. Methodologically, disruptive innovation can hardly be captured with the tools of market definition and market power analysis, which do not account for the competition for the definition of the relevant market that is characteristic of disruptive innovation. In addition, competition authorities experience difficulties in acting quickly enough to deal effectively with attempt to prevent disruptive innovation.
However, incumbent firms on the established market can hinder disruptive innovation. The theory of harm is that an incumbent firm with market power seeks to prevent a potential disruptor from another market from executing its strategy, using either (i) anti-competitive practices designed to prevent the creation of an overlap between its innovative product and the established market or (ii) an acquisition with a view to mothball the disruptor and its invention. Against the former, competition authorities should seek to keep markets open and act quickly to prevent practices such as defensive leveraging (as in the Microsoft Explorer case) or the use of IP protection to lock away features of the value network. Against the latter, additional merger thresholds (based on a discrepancy between transaction value and turnover) and an expanded concept of the maverick firm could be effective.