Contestability matters more than concentration

We will be done with Nobel pieces soon, but one more!

This week’s newsletter is an expanded version of a post that originally appeared on Truth on the Market, a website full of scholarly commentary on law, economics, and more.

The 2025 Economics Nobel went to Joel Mokyr, Philippe Aghion, and Peter Howitt for exploring innovation-driven economic growth. I already wrote a general explainer about the prize.

Here I want to make a different claim: If you work in antitrust, you should pay particular attention to their scholarship. Their work, especially that of Aghion and Howitt, fundamentally changes how we think about competition in markets.

The standard antitrust framework inherited from 1960s industrial organization focuses on market structure. Count the firms. Measure concentration. Assume that structure determines conduct, which determines performance. More firms mean more competition, which means lower prices and better outcomes. The U.S. Merger Guidelines embody this view with their use of Herfindahl–Hirschman index (HHI) thresholds.

The Aghion-Howitt framework tells a different story. Competition is a process of innovation and displacement. Firms compete by trying to make better products, not just by cutting prices on existing ones. What matters is not the number of firms at any point in time, but whether new innovators can challenge incumbents. Market structure is an outcome of this competitive process, not just a cause of competitive behavior.

Let me walk through what Aghion and Howitt’s work actually says and what it means for how we think about competition policy.

Competition as Creative Destruction

The key paper from Aghion and Howitt is their “A Model of Growth Through Creative Destruction.” The paper starts with a pure theory question. Endogenous-growth papers in the late 1980s from the likes of Paul Romer and Robert Lucas made knowledge accumulation drive long-run growth, but typically via horizontal variety or learning without obsolescence.

The Nobel Committee starts with something more important: a puzzle about the world.

Advanced economies show smooth, steady growth in GDP—roughly 2% per year in the United States for decades. Yet underneath that smooth aggregate, the micro-level economy is turbulent. In the last quarter of 2024 alone, the U.S. economy created 8 million jobs, while simultaneously destroying 7 million jobs. How do we get smooth growth from such messy dynamics?

Aghion and Howitt’s answer: innovations arrive across many sectors. In any single sector, you see sudden jumps when breakthroughs happen. Netflix enters ...