Report on Antitrust and Entrepreneurship

The Report on Antitrust and Entrepreneurship is a part of an American Antitrust Institute (AAI) project, made possible by a grant from the Ewing Marion Kauffman Foundation. The project kicked off at the beginning of 2015. The first major milestone was in June of 2015, with the Invitational Symposium Antitrust and Entrepreneurship: A Multidisciplinary Perspective. The second milestone was the publication of the Symposium Issue of the Antitrust Bulletin in December 2016.

The AAI’s focus on antitrust and entrepreneurship is motivated by the importance of entrepreneurial activity for competition and economic growth. Recent research documents the slowing pace of entry into the economy by new firms and the increasing rate of failure of many early-stage firms. There are growing indications that these outcomes may be linked to growing consolidation but theoretical and practical limitations inherent to existing antitrust analysis tend to systemically undervalue entrepreneurial activity.

The special issue of the Antitrust Bulletin includes seven articles and six comments that take up key questions concerning the relationship between antitrust and entrepreneurship. The papers examine the important relationship between entrepreneurial activity and competition policy and enforcement that is key to an economy that revolves around job creation, investment, equality, innovation, higher living standards, consumer benefits, and the long-term vibrancy of the economy.

Authors and commenters examine a variety of issues and questions. These include the risk-taking, initiative, and entrepreneurial drive that make up the mindset of successful entrepreneurs; and the requisite competition enforcement environment that fosters the recognition and development of business opportunities that define the entrepreneurial process. Contributors to the report also examine aspects of entrepreneurial activity that challenge competition and economic growth.

View abstracts for the articles and comments below. PDFs of the complete chapters of Antitrust Bulletin 2016, Vol. 61(4) available for download.

Entrepreneurship and Antitrust: Introduction and Overview

Issue Editors: Gregory T. Gundlach, University of North Florida and Diana Moss, American Antitrust Institute

Despite the importance of entrepreneurship to innovation and economic growth, measures of business startups and other indications of entrepreneurial activity remain below historic norms. Consequently, growing interest resides at the intersection of antitrust and entrepreneurship. This special issue of the Antitrust Bulletin examines the nature and importance of entrepreneurship to the economy, the challenges that entrepreneurial activity poses for antitrust policy and analysis, and solutions intended to address those challenges.

A Vocabulary for Conversing about Entrepreneurship, Innovation, and Antitrust

Author: Albert A. Foer, American Antitrust Institute

As an introduction to the discussion of entrepreneurship, innovation, and antitrust, this article defines key terms, particularly focusing on the relationship between the concepts of innovation and entrepreneurship. In the process, the author considers ways in which the antitrust laws may apply to each. Nearly all the key words were shown to have multiple meanings and usages, forcing us to be as explicit as possible in assigning varying roles for antitrust to varying meanings of entrepreneurship.

The Complexity of Conversing About Entrepreneurship, Innovation, and Antitrust
A Comment on “A Vocabulary for Conversing About Entrepreneurship, Innovation, and Antitrust”

Commenter:  Peter C. Carstensen, University of Wisconsin

The relationship between law including competition policy and the goal of advancing innovation and entrepreneurship is complex. Bert Foer’s chapter identifies the many ways that competition law and policy directly and indirectly can affect positively or negatively the advancement of that goal. The comment seeks to highlight that range and complexity by using the categories from the traditional I-O Paradigm to show where and how antitrust law and policies it seeks to advance can be used to shape the conditions, structure, and conduct in markets to facilitate outcomes that will advance the public interest in innovation and entrepreneurship.

The View from the Shop—Antitrust and the Decline of America’s Independent Businesses

Author: Stacy Mitchell, Institute for Local Self-Reliance

Small businesses have declined sharply in both numbers and market share across many sectors of the economy. There is evidence that this decline is owed in part to anticompetitive behavior by dominant firms, which have used their market power to disadvantage smaller competitors and exclude new entrants. These abuses have gone unchecked because of changes in the ideological framework guiding antitrust enforcement. About thirty-five years ago, policy makers came to view maximizing efficiency, rather than maintaining fair and open markets for all competitors, as the paramount goal of antitrust. There are at least three reasons to bring a commitment to small businesses and fair markets back into antitrust policy: small businesses deliver distinct consumer benefits, contribute to a more equitable distribution of income and opportunity, and safeguard democracy.

The View from the Shop—Antitrust and the Decline of America’s Independent Businesses
A Comment on “The View from the Shop”

Commenter:  Ann Marie Mehlum, U.S. Small Business Administration, retired

Stacy Mitchell’s View from the Shop—Antitrust and the Decline of America’s Independent Small Business is the latest contribution in a string of recent articles and reports calling for a renewal in antitrust policy.

Is Bounded Rationality in Entry Decisions Necessarily Bad for Social Welfare?

Author: Avishalom Tor, University of Notre Dame Law School

This article examines entrepreneurial activity and its implication for policy and antitrust law from a behavioral perspective. In particular, the analysis here focuses on the role of two sets of behavioral phenomena—overconfident beliefs and risk-seeking preferences—in facilitating boundedly rational entrepreneurship. Boundedly rational entrepreneurs may engage in entrepreneurial activity, such as the starting of new business ventures, under circumstances in which rational entrepreneurs would decline to do so. Consequently, overconfident or risk-seeking entrants compete with their more rational counterparts and create a post-entry landscape that differs markedly from the picture assumed by traditional economic accounts of entrepreneurial activity. The behaviorally informed analysis of entry sheds new light on the dynamics of competition among entrepreneurs and on its implications for policy and antitrust law.

Is Bounded Rationality in Entry Decisions Necessarily Bad for Social Welfare?
A Comment on “Boundedly Rational Entrepreneurs and Antitrust”

Commenter:  Michal S. Gal, University of Haifa

In the article Boundedly Rational Entrepreneurs and Antitrust, Professor Tor provides an excellent overview of the effects of bounded rationality on the behavior of entrepreneurs in the marketplace. In this short note, I offer some observations on the article. In particular, it suggests several additional parameters that might be worth exploring before we can reach a conclusion about the role that bounded rationality plays in economically irrational entry decisions. It also suggests some factors that should be weighed before determining whether irrational entry is socially harmful. Finally, the note provides several observations with regard to regulation, including the effects of algorithmic applications on bounded rationality decisions by entrepreneurs.

Different Entrepreneurial Ventures for Greater Societal Value: A Portfolio Approach to Assist Public Policy

Author: Donald F. Kuratko, University of Indiana

Although the importance of entrepreneurship is evident and interest continues to grow, high-growth ventures tend to be featured because they produce a significant amount of job and wealth creation in the United States. Some have argued that the focus of public policy should be on these ventures, while others argue for a more diverse approach to effective public policy and entrepreneurship. This article offers a “portfolio approach” to public policy that focuses on the types of entrepreneurial ventures that demonstrate the epitome of competition and provide the greatest societal value. The types of ventures may be classified in terms of size (microenterprise, small/lifestyle, medium size, and gazelle) and growth rate (low, managed, or fast growth). Each type has different needs and makes unique contributions to the economic vitality and value of society.

Entrepreneurship, Competition, and Economic Development
A Comment on “Different Entrepreneurial Ventures for Greater Societal Value”

Commenter:  Sharon F. Matusik, University of Colorado

Entrepreneurial activity leads to the development and exploitation of new ways to do business, which in turn promotes competition either as a firm enters a market where there are other existing firms, or when it creates a new way (substitute) to meet the needs of its customers. This essay discusses indirect outcomes associated with these entrepreneurial activities, specifically in the form of knowledge spillovers, economic renewal, consumer surplus, and social value creation. In sum, entrepreneurship and the competition it engenders can create direct and indirect benefits to the entrepreneurs themselves, prospective employees, consumers, competitors, and localities and governments. Further, this essay notes that while most efforts to encourage entrepreneurial activity focuses on formal policy levers such as financial investment, public support programs, and tax and regulatory policy, it is also important to consider informal institutions and how they inhibit or encourage such activity.

Applying the Ecosystem Metaphor to Entrepreneurship: Uses and Abuses

Author: Daniel J. Isenberg, Babson College

This article uses a comparison of the generic features of natural ecosystems and the popular use of the term “entrepreneurship ecosystems” and identifies five mistakes in the way the ecosystem metaphor is applied from the natural sciences: the creation mistake, the centralized control mistake, the geography mistake, the intention mistake, and the entrepreneur-centrality mistake.

Organic or Deliberate
A Comment on “Applying the Ecosystem Metaphor to Entrepreneurship”

Commenter:  Stuart Read, Willamette University

The impetus for understanding where novelty comes from in the environment is clear. Entrepreneurs create new jobs for themselves, new offerings for customers and broader economic and social benefits for society at large. The difficult part comes in understanding the source of this novelty well enough that it might be instrumented, managed and encouraged. The companion essay to this one (Applying the Ecosystem Metaphor to Entrepreneurship: Uses and Abuses) adopts a perspective that ecosystems create entrepreneurs, and thus effort need be applied to creating ecosystems. I reverse the causality. Arguing for the agency of creative entrepreneurs, I suggest a view of environments as outcomes, and entrepreneurs as inputs. Building on this alternative perspective, it makes sense to direct effort toward creating entrepreneurs such that they might go on to create that broader slate of artifacts we so desire in the environment, including environments themselves.

Entrepreneurship, Innovation, and Antitrust

Author: Robert E. Litan, Consultant

Entrepreneurship is key to productivity growth, yet in recent decades new-firm formation has flagged. There is some evidence that business concentration may be a contributing cause. Well-designed antitrust enforcement policy, especially aimed at policing abuse of market power by dominant platforms, will be crucial to preserving opportunities for new entrants, especially in technology sectors. But antitrust procedures should also be updated to speed up decisions so that legal outcomes are not completely outpaced by technology.

Entrepreneurship and Antitrust Enforcement
A Comment on “Entrepreneurship, Innovation, and Antitrust”

Commenter:  Shubha Ghosh, University of Wisconsin

Antitrust enforcement can promote entrepreneurship by creating an economic environment that is more suitable to market entry by start-up firms that challenge existing business models. Several reforms for improving antitrust enforcement would be desirable. First, antitrust enforcement can be procedurally mainstreamed. Second, merger review can be more aggressive. Third, rules about FRAND licensing can be clarified and implemented more predictably. This article analyzes these proposals and makes other recommendation for improving antitrust scrutiny of markets.