Author(s)
Source
Journal of Industrial Organization Education, Vol. 1, Issue 1, Article 8, 2006; Chapter in Issues in Competition Law and Policy, Wayne Dale Collins, ed., American Bar Association Antitrust Section, 2006
Summary
This paper looks at how mergers affect research and development (R&D) and product innovation.
Policy Relevance
Mergers sometimes lead to more innovation, but there is little evidence that monopolies innovate more. How R&D affects consumers is complex and hard to predict.
Main Points
- The Department of Justice and the Federal Trade Commission now challenge mergers in sectors that spend a lot on R&D partly because of concerns about innovation.
- Problems with innovation analysis include difficulties predicting the outcome of R&D:
- Some innovations come from outsiders; though new medical treatments are unlikely to come from a firm not researching the disease.
- Reducing the number of firms can increase R&D and lead to new products; it does not necessarily mean less diversity in R&D.
- Economic forces shaping innovation include: 1) Profits from new products, especially if copying is limited by rights like patents; 2) High profits from old products can discourage innovation; 3) Benefits from gaining advantages over rivals, e.g. by lowering costs; 4) Benefits from discouraging new rivals.
- When innovations are protected as trade secrets—usually for processes, not products—several firms can discover and use an innovation and must share the benefits. R&D might be lower, or fragmented.
- Studies show mergers can help consumers by avoiding duplicative R&D, when firms wastefully duplicate one another’s discoveries.
- When innovation is protected by patents, competition can encourage R&D, especially for drastic innovations that make existing products obsolete. In theory a monopolist could profit more from innovation, especially to forestall rivals.
- Studies show:
- More competition from imports increases labor productivity, perhaps due to innovation.
- Leading firms find it hard to innovate to stop new entry and this is rare.
- For product innovation, R&D grows with larger business unit size, not firm size, suggesting that Schumpter is wrong to say monopolies innovate more.
- Regulators should consider 1) the intensity of competition among firms for existing product; 2) whether the innovation is a major improvement; 3) Whether the innovation lets a monopolist profit from selling both the new and old product-otherwise, competition is likely to improve innovation; 4) that leading firms are unlikely to succeed in using innovation to stop new rivals.
