Author(s)
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.