Competition, Regulation and Strategy in Industries with Consumer Side Scale and Scope Economies: An Essay in the Context of the Information Technology Industry

Abstract

The IT industry (both software and hardware) is characterised by `vast consumer side scale and scope economies which are incomparably larger than in other industries with supply side network economies like pipelines or electricity distribution. In IT the supply side economies are also incomparably larger because the marginal cost of an additional unit of the software or hardware especially the former is very small. But its uniqueness arises on the demand side. The interaction of these two economies, in a situation of heightened technological dynamism, imposes a greater degree of contingency, and hence path dependency in the developments in the industry as a whole. In this respect these industries are therefore distinguished from nearly all other prior industries. It makes possible giants line Microsoft and CISCO. Even as they extract significant part of the scale economies in the form of large profits, such firms are competitive in the more relevant dynamic sense. The endogeniety of critical points in the development of the industry implies considerable scope for strategy on the part of such large firms. It also means that inter-firm linkages dynamically develop and thrive even in societies like the US that have been abhorrent of extra-market links, and have had the conceptual space to recognise only two kinds of economic coordination - within firms (managerial hierarchies) and through markets. Path dependency implies that physical clusters in IT have a far stronger economic logic, and the difficulties in the emergence of new clusters are far more severe. Traditional anti-trust like regulation or price regulation is entirely outmoded for the development of these industries. To challengers (countries and clusters) few independent options exist. Strategies with the most potential would involve promoting inter-firm linkages, promoting industries with the least need to be in contact with other firms, in fresh clusters. The effort has to be to lower the time and cost of networking with the dominant cluster. The costs of disassociation are too large even for large countries attempting to have a role in the evolution of IT industries, so that closed-door approaches are almost entirely unworkable.