Antitrust and Innovation Competition

Innovation and Economic Growth, Intellectual Property, Competition Policy and Antitrust, Patents, Interoperability and Standards

Article Snapshot

Author(s)

Daniel Spulber

Source

Journal of Antitrust Enforcement, Vol. 10, pp. 1-57, 2022

Summary

Some antitrust policymakers are recognizing the importance of innovation competition, including nonprice competition and technological change. Antitrust policymakers must update their analysis to avoid errors.

Policy Relevance

Outdated economic analysis will hamper competition and discourage innovation.

Main Points

  • Traditionally, antitrust enforcers used theoretical models of perfect competition and imperfect competition to identify competitive markets.
     
    • Both models revolve around price competition and ignore non-price competition.
       
    • Both models lead to examination of a snapshot of the industry frozen in time.
       
    • Neither allows for innovation, invention, entrepreneurship, or technological change.
       
  • Incorporating understanding of the economics of innovation competition will challenge antitrust policymakers; traditional evidence of price and market structure might lead courts to mistakenly identify a firm as a monopolist, while technological change ensures the market remains competitive.
     
  • Long-term measures of conduct give the most accurate picture of the health of competition within a sector; the appropriate time frame depends on the industry, the technology, and the innovation.
     
  • Innovation competition proceeds in stages, i) discovery ii) invention iii) the incorporation of inventions in innovations, and iv) adoption by consumers and firms; policymakers should use dynamic analysis to understand how each stage relates to the others.
     
    • Firms bear innovation costs before earning revenues, so short-term losses and later profits do not show that a firm has become a monopolist.
       
    • Innovation spurs competitors to improve or exit the market, so the exit of less efficient competitors from the market does not show the remaining firm is a monopolist.
       
    • Innovation involves risk; losses and profits might be a result of risk-taking rather than anticompetitive behavior.
       
  • Large market shares do not mean anticompetitive conduct has occurred, as technological change enables smaller firms to displace industry leaders in a process of "creative destruction."
     
  • Antitrust policy should maximize economic benefits to consumers, minus production costs; technological changes may make consumers better off even if prices exceed costs.
     
    • An innovative product such as a new smartphone can benefit consumers enough to compensate them for paying a higher price, improving consumer welfare.
       
    • Price increases do not show that any firm has monopoly power.
       
  • Traditionally, the goals of intellectual property (IP) policy and antitrust seemed to conflict, as some argued that IP protection leads to monopoly; in fact, IP fosters both innovation and competition.
     
    • Intangible assets such as patents are among the most valuable assets in the global economy.
       
    • Legal decisions that use antitrust laws to weaken IP rights hamper innovation competition.
       
  • Standard-setting organizations promote competition, involving many firms in standard setting and easing the adoption of new technologies.
     
    • Courts should allow Standard Essential Patent (SEP) holders to enjoin patent infringement.
       
    • Antitrust rules that target SEPs discourage innovation and reduce incentives to participate in standard-setting by attacking valuable patents.
       
  • Observers disagree as to whether a SEP patent holder should license its patents to the producers of intermediate components, or only to the makers of final products.
     
    • Licensing to makers of the final product avoids the costs of negotiating with numerous firms involved in component production.
       
    • Licensing at the final stage facilitates consolidation of licensing by patent pools.
       
    • Licensing at the final stage lets the market value of the final product be assessed accurately.
       
  • Antitrust enforcers should consider how mergers affect innovation competition, as do the Federal Trade Commission’s Horizontal Merger Guidelines.
     
    • Generally, competition first increases and then decreases innovation.
       
    • Mergers benefit innovation if complementary R&D investments are combined, or if the merger enables economies of scale and scope in innovation.
       

Get The Article

Find the full article online

Search for Full Article

Share