Competition: Both Driver and Brake for Economic Growth
An analysis of competition's role in economic development based on research by Nobel laureates Acemoglu and Howitt. Why innovation requires moderate competition, how digital platforms affect technological progress, and what policies Russia needs.
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Competition plays a dual role in economic development: in statics it reduces prices and increases production volumes, but in dynamics a balance between competition and monopoly is important for innovation. Nobel laureates Aghion and Howitt proved that innovation activity depends on competition according to an inverted U-curve principle—both weak and excessively strong competition harm innovation. For Russian digital platforms at the formation stage, the priority of industrial policy over competition policy is justified, but competitive pressure should intensify when innovation dynamics slow down.
During President Putin's direct line on December 19, 2025, when asked about the rollout of Russia's national messenger MAX and its special status, Vladimir Putin confidently noted that "competition is always necessary," including for such developments. This answer seems fairly obvious at first glance, but as soon as economists begin thinking about the criteria for when competition is necessary—and especially about differentiating these criteria across industries—an entire layer opens up, not just of expert commentary, but of high-level research, including Nobel Prize-winning work.
When discussing the role of competition in the economy as a whole and in individual sectors, we can't avoid distinguishing between economic statics and dynamics. In static terms—from the perspective of equilibrium characteristics in an economic system—the advantages of competition are clear. Only perfectly competitive equilibrium avoids the deadweight losses inherent in any degree of monopolization, or more precisely, imperfect competition. Without competition, prices become higher and production and consumption volumes lower than they could be. But even in this situation, the advantages of competition aren't always unambiguous if we recall "market failures." When the production or consumption of a good is dangerous to the environment or harmful to health—that is, when negative externalities exist—raising prices and reducing volumes is exactly what the state should aim for. And when a market has information asymmetry and product quality differentiation, as in George Akerlof's classic case of the used car market, it's precisely competitive pressure that forces sellers to compete on price, while other product parameters remain invisible to users, so that under price competition, only the cheapest and worst goods remain on the market.
Sources (10)
1. herif, R., Hasanov, F., & Aghion, P. (2023). Fair and inclusive markets: Why dynamism matters. Global Policy, 14(5), 686-701.
2. Шаститко А.Е., Курдин А.А., Филиппова И.Н. (2023). Мезоинституты для цифровых экосистем, Вопросы экономики, 2, 61-82
3. Шаститко, А. Е. (2014). Зачем конкурентная политика, если есть промышленная? Экономическая политика, 4, 42-59; Aghion, P., Cai, J., Dewatripont, M., Du, L., Harrison, A., & Legros, P. (2015). Industrial policy and competition. American economic journal: macroeconomics, 7(4), 1-32.
4. Aghion, P., Antonin, C., & Bunel, S. (2021). The power of creative destruction: Economic upheaval and the wealth of nations. Harvard University Press.
5. Aghion, P., Bloom, N., Blundell, R., Griffith, R., & Howitt, P. (2005). Competition and innovation: An inverted-U relationship. The quarterly journal of economics, 120(2), 701-728.
6. Arrow, K. (1962). Economic Welfare and the Allocation of Resources to Invention. In The Rate and Direction of Inventive Activity: Economic and Social Factors (pp.609-626). Princeton, NJ: Princeton University Press.
7. Schumpeter, J. A. (1942). Capitalism, Socialism, and Democracy. New York: Harper & Brothers.
8. Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of economics, 70(1), 65-94; Swan, T. W. (1956). Economic growth and capital accumulation. Economic record, 32(2), 334-361.
9. Подробнее см., например, Шаститко А.Е., Курдин А.А., Филиппова И.Н. (2023). Мезоинституты для цифровых экосистем, Вопросы экономики, 2, 61-82; Шаститко А.Е., Маркова О.А. (2020). Старый друг лучше новых двух? Подходы к исследованию рынков в условиях цифровой трансформации для применения антимонопольного законодательства, Вопросы экономики, 6, 37-55.
10. Akerlof, G. A. (1978). The market for “lemons”: Quality uncertainty and the market mechanism. In Uncertainty in economics (pp. 235-251). Academic Press.
The messenger market also requires special consideration. On one hand, network effects are significant—meaning a messenger's utility depends on the number of subscribers—and in this sense, the larger the share of users who use (entirely or primarily) a given messenger, the better for each of these users, and in this sense even a monopoly isn't so bad. On the other hand, a messenger, if we set aside premium options, is provided to users at zero price, and the argument about monopolistic behavior in the form of price inflation doesn't seem valid here.
Such characteristics in themselves warrant caution about competition in such "digital" markets, as my colleagues and I have written repeatedly,2 but considerations of economic dynamics begin to play a special role in this context. Growth theory in its modern formulation pays close attention to its microfoundations at the level of industry and market structures—that is, which organization of industries and markets is more or less conducive to growth. The best evidence of this is this year's Nobel Prize in Economics awarded to Philippe Aghion and Peter Howitt.
The story of technological progress's key role in economic growth appeared in formalized form in growth theory at least as early as the 1950s, with the Solow-Swan model considered its chief manifestation.3 But progress in their model was exogenous, an external factor not explained within the model itself. Later, in searching for explanations of such innovation-driven growth in the economy, concepts of human capital and learning by doing were employed, along with institutional foundations such as property rights protection, particularly intellectual property. But all these approaches point more to necessary or simply important, but not sufficient, conditions for creating and implementing innovations. Indeed, if an economy has many people with good education, if it has experience applying advanced technologies, if innovators' rights are well protected, then the innovation climate there seems more favorable, but all these factors don't explain why specific people would engage in innovative activity. The problem with many basic growth models was that they assumed perfect competition, but under these conditions innovators have no incentive to spend on developing and implementing innovations, which is a very costly process. Under perfect competition, information about innovations spreads instantly across the market with no way to limit its dissemination, and fierce competition among firms prevents anyone from ever earning high economic profits from innovation.
Joseph Schumpeter in the mid-20th century proceeded from the premise that the need to ensure high profits for innovators fully justifies the appropriateness of significant market power for individual, most successful firms—in simpler terms, elements of market monopolization.4 Kenneth Arrow (Nobel laureate in 1972) proposed a microeconomic model twenty years later that led to the opposite conclusion: under monopoly conditions, firms face no pressure and therefore have no incentive to change anything in their operations, including pursuing innovation.5 Recognizing that without incorporating the factor of competition or monopoly into growth models, it would be difficult to explain incentives for technological progress, another quarter-century later Paul Romer (Nobel laureate in 2018) built imperfect competition into growth models, though he essentially just made technical provisions for it without much detail. Only in the early 1990s did Philippe Aghion and Peter Howitt (who received the Nobel Prize this year, in 2025—precisely for this work) model the process of innovation-driven economic growth in detail. In this process, competing innovators, counting on elements of monopoly profit in case of future success, invest in developing innovations. If competition is expected to be too fierce, there is little incentive to invest, but if there is no competition at all, incentives won't emerge either.
This logic later allowed Aghion and Howitt, together with co-authors, to derive a distinctive inverted-U relationship between the level of innovation activity and competition, meaning that both weak competition and excessively strong competition are bad for innovation.6 However, this relationship holds "on average," while there can be quite serious differentiation among firms: for more technologically advanced firms, competition will have a rather positive effect on innovation, while for laggards it will be the opposite. It seems that under this logic, in digital sector industries experiencing rapid technological development, increased competition will play a rather positive role.
Aghion's more recent skeptical positions regarding the prospects for technological development in a world dominated by digital platforms follow this same line of thinking. Criticizing the techno-optimism of another 2025 Nobel laureate, Joel Mokyr, Aghion and colleagues note the dual contribution of market-dominating digital giants to technological development. On one hand, early in their trajectory they were more efficient and, by expanding their market share and entering new markets, they facilitated the introduction of innovations there. On the other hand, over time, as their positions strengthen, opportunities for innovation by new firms are sharply reduced. New entrants must either achieve radical innovation that fundamentally changes the market situation, or drastically reduce costs—but this inherently erodes the future innovator's rent.7 We should add that digital giants often possess significant informational advantages, including through collecting data on customer behavior, which allows them to obtain advance information about promising competitors with potentially radical innovations and acquire them. As a result, many "second-tier" firms and promising startups are simply deprived of incentives to innovate, and in theory the state should treat the dominance of digital platforms with maximum severity and criticism under these conditions.
But these arguments work well for certain stages in the development of digital platforms: either when they have reached the height of their power, having taken control of the most important markets—whether social networks, messengers, search, or online marketplaces—or when there are essentially no domestic platforms of this kind and their advancement is not planned. The first case is the U.S., the second is the European Union. Then the focus is on controlling the market power of one's own (as in the U.S.) and especially others' (as in the EU) digital platforms, which is the purview of competition policy. But if platforms are precisely at the stage of expansion and establishment, forming their market niche, then the question arises of industrial policy toward digital platforms, their support and protection of their interests. Industrial policy in Russia is often used specifically in relation to manufacturing, but in fact in the global context the term "industrial policy," or "sectoral policy," applies to a much broader range of sectors, including the digital services sector.
Competition and industrial policy are certainly not opposites, and in modern practice are viewed as complementary directions of economic policy.8 But sometimes their intersection has complex features—as, for example, in the case we examined in one of our recent studies9 involving the interaction between leading digital ecosystem companies and complementor companies that operate within these systems and are forced to comply with the leaders' rules. The very structure of an ecosystem both requires internal rules and presupposes a special position for the leading company. Attempts to artificially level the playing field among participants may look attractive from the standpoint of protecting the weaker party, but sometimes threaten to sink the entire ecosystem.
At present, it's clearly premature to speak of an unconditional priority of competition policy over industrial policy with regard to Russian ecosystems, since they have not yet realized their main opportunities in a number of market niches and need if not support, then at least a favorable climate. Therefore, industrial policy considerations in defense of domestic digital platforms, even if they appear not entirely pro-competitive, have a right to exist. But in a certain sense, competition policy here must become more demanding: as Aghion, Cherif, and Hasanov noted in a recent article—and one can agree with them in our conditions as well—competition policy should be reconceived not only or even primarily in terms of prices and consumer welfare, but rather in terms of conditions for creating and disseminating technologies.10 In other words, as soon as innovation dynamics prove unsatisfactory, competitive pressure must inevitably be intensified—but not in the form of competition for state attention, but rather genuine market competition. This will ultimately affect welfare as well, exerting a stronger and more sustainable impact than endless "hothouse" support or, conversely, a simultaneous combination of both regulatory and competitive pressure.
