Competition Policy International, Vol. 3, No. 1, 2007
This paper considers how innovation affects competition.
Innovation that helps consumers might not come about if we assume that firms are not permitted to take business from competitors.
Traditionally, a court looking at business activity to see how it affects competition will look for signs like willingness to sacrifice profits to harm competitors.
With innovation, firms direct resources into activities like research that are not profitable right away. Rewarding the firm that does this helps consumers, because otherwise new products might not be developed.
If competition policy punishes firms that accept lower profits in the short run in the hope of future rewards, competition policy risks harming consumers by reducing innovation.
Examples of innovations that traditional competition policy might punish include Microsoft’s decision to add features to Windows and pharmaceutical firms’ decisions to extend patents on existing products by exploring new uses for the product.
When thinking about whether a business activity hurts or helps consumers, we should realize the innovation might not have been made if the firm had been required to innovate without taking business from competitors.