When is Static Analysis a Proxy for Dynamic Considerations? Reconsidering Antitrust and Innovation

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot

Author(s)

Joshua Gans

Source

in Innovation Policy and the Economy, Vol. 11, Josh Lerner and Scott Stern, (eds.), Chicago: University of Chicago Press, 2010, pp. 55-78

Summary

This paper considers how different types of markets affect analyses of antitrust policies.

Policy Relevance

When firms compete for a market by investing in product innovations, optimal antitrust policy will make market entry through innovation easy.

Main Points

  • Antitrust analysis of markets where entrants are innovating firms is difficult because antitrust policies have mixed effects on innovation.
  •  

  • Antitrust policies prevent incumbent firms from suppressing profits of innovative firms, incentivizing innovation.
  •  

  • Antitrust policies also decrease the value of incumbency, lowering future profits of innovative entrant firms and so disincentivizing innovation.
  •  

  • When new firms compete with existing firms, the rate of innovation in a market can be increased by outlawing any incumbent practice that generates profits by making innovative entry difficult.
  •  

  • Making entry to a market easy helps today’s entrants initially, but tomorrow the entrant will be an incumbent, and facilitating the entry of other firms will hurt them. This sort of long-run problem is called a dynamic consideration, but it turns out not to matter in most cases: policymakers should usually ignore the future and make entry consistently easy.
  •  

  • However, when innovating firms cooperate with incumbent firms through mergers or licensing, dynamic considerations are important.
  •  

  • It is difficult to draw any general conclusions about dynamic considerations in antitrust policy analysis when firms enter a market by cooperating with incumbents.

Get The Article

Find the full article online

Search for Full Article

Share