In this essay we discuss the proposition, held by many economists and legal scholars, that with dynamic competition—i.e., competition for the market through sequential winner-take-all races won through significant innovation—it is natural and not an indication of market failure for the successful firm to have a high market share for a sustained period of time. The debate today centers on whether evidence of long-held high market shares in high-technology markets implies that this proposition is flawed and innovation races fail to pose a sufficient competitive constraint such that market structure matters. We conclude this is not the case because market contestability does not require shifts in market shares (setting aside the question of whether high market shares are a result of artificially narrow market definitions). Instead, we explain that testing the dynamic competition hypothesis requires an investigation of the innovation efforts of the market leaders over time. Have they increased or decreased their R&D investments? Does their behavior indicate that entrants are in fact playing a disciplinary role on industry leaders? Interventions that ignore these questions may well reduce the market share of these leading firms, but at the expense of decreasing innovation and reducing consumer welfare.
