11 Dynamic Efficiency, Competition and conglomerates
Fast-paced innovation has incentivised production, altered industries’ creation, and even allowed us to think of information democratisation by increasing knowledge access. Nonetheless, this has come with a set of new economic questions to answer, for example, are digital companies creating monopolies of information through user data? How can we regulate and develop regional policies when the internet is a global resource? How have competition authorities faced the changing dynamics of firms and intellectual property?
Fast-paced innovation allows firms to increase their production capacity and their profit, so that they can invest in their capacity increasing their production or develop new products. Think of firms like Amazon, starting as an online book-seller and diversifying their product to now be known as a provider of virtual assistant technology, Alexa. Economists and business scholars are interested in explaining this phenomenon as it highlights production and how firms expand.
Edith Penrose (1914-1996) was among the first of these economists. In her book The Theory of the Growth of the Firm (Penrose, 1959), she explains a firm through its organisational capabilities. When you have people performing tasks daily, they can develop knowledge and reduce the time they take, therefore increasing the organisation’s productivity. She explains that the productivity increase leaves time for firms to create other products taking advantage of the knowledge already generated and the managerial administration they already have set up. Therefore, firms’ main limitation is management, as managers need time to decide what strategies to follow, and this can impede growth.
This interpretation of production is completely different from the Neoclassical school, and it is known as the dynamic view of the firm. Penrose’s interpretation became the basis for the resource-based view of the firm, as it explains firms according to their resources: employees, equipment, managers, and knowledge. The resource view of the firm allows us to understand how firms’ administration and organisation let them diversify, and in some cases, as the Amazon example shows, it permits them to break industrial boundaries and challenge other industries whose biggest incumbents did not expect it to become a competitor.
When firms break industrial boundaries and create an internal financial market, they are able to become conglomerates. Conglomerates are formed when a single firm owns operations in a number of different industries. Some of the best known digital conglomerates are Amazon, Apple, Samsung, Alphabet and Microsoft. They have diversified into industries including hardware, services, software, artificial intelligence, automotive, television and gaming technologies.
As firms’ operations change and expand into conglomerates competition also does, as their market power becomes more relevant in the economy. Conglomerates have found different ways to compete against their potential rivals, which in some cases have toyed with abuse of dominance. In the next section, we will be analysing some of these competition strategies.