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Antitrust Chronicle® – Competition & Innovation

BY | September 28, 2023

Dear Readers, At the heart of antitrust there are two fundamental, sometimes conflicting, concepts: “competition” and “innovation.” In essence, competition is the striving against others for the same prize, while…

Dear Readers,

At the heart of antitrust there are two fundamental, sometimes conflicting, concepts: “competition” and “innovation.” In essence, competition is the striving against others for the same prize, while innovation embodies the creation of the new and novel. Their antonyms, “complacency” and “stagnation,” represent stasis and lack of progress, the very societal ills antitrust seeks to avoid.

Clearly, without innovation, competition loses its forward momentum: it becomes a static race with no finish line in sight. Conversely, unchecked innovation can skew the playing field, destabilizing the very essence of competition. Within this mix there is the intellectual property regime: patents, instruments designed to foster innovation by protecting inventors, can, at times, also stifle the very progress they aim to encourage.

This edition of the Chronicle delves into the relationship between antitrust law and innovation, spanning ex post antitrust enforcement and merger control, across various industries. The contributions explore the nuanced dance between ensuring healthy competition and fostering groundbreaking progress. All agree that competition must spur innovation without being hindered by overly restrictive legal frameworks. The question is how best to achieve this,

To open, George L. Priest addresses the value of innovation as an ambition of U.S. antitrust law. The piece argues that innovation ought to be a principal goal of the antitrust laws, but has not been. The author shows, however, that the malleability of the U.S. antitrust laws may allow innovation to be a principal value in the years ahead. In short, in his view, the provisions of the Sherman and Clayton Acts are sufficiently open-ended to allow for multiple interpretations. If the objective is to develop a strong and vibrant economy, the policy of competition rules ought to be to promote innovation.

Economic analysis of dynamic efficiency is essential for antitrust policy. Daniel F. Spulber argues that measuring dynamic efficiency is feasible for antitrust policy makers, introducing the concept of the innovative delta as a measure of dynamic efficiency. The innovative delta measures the welfare effects of an observed technological change. In merger policy, a positive innovative delta could provide an efficiency defense for a merger, whereas a negative innovative delta could indicate harm. The innovative delta also supports a rule of reason approach to innovation competition.

Capturing innovation poses challenges for antitrust law and practice, despite innovation being recognized as one of antitrust’s primary objectives. As such, Viktoria H.S.E. Robertson & Klaudia Majcher focus on the problem of defining “innovation,” and what type of innovation deserves to be promoted. Focusing on the U.S. and the EU, the piece illustrates that despite efforts to rethink market definition, a coherent approach to innovation markets appears to be lacking. Safe harbors similarly fail to do justice to the value of innovation. Overall, in the authors’ view, the question of how to consider innovation in antitrust is highly contingent on two fundamental questions: What is the relationship between competition and innovation? And how can we identify the type of innovation that antitrust should aim to promote?

As Michael A. Carrier wryly notes, the term “innovation” has a spellbinding effect. Because innovation is the lifeblood of the U.S. economy, no one can be seen to stand against it. To do so would be synonymous with backwards thinking and technological regression. For that reason, arguments that changes in the law or industry practice would harm innovation tend to be considered seriously. But that does not mean they are correct. This article criticizes the argument that innovation is reflected solely by the initial invention. In the standards context, many who have taken a “pro-licensor” perspective have focused only on the initial invention, claiming that any weakening of patents or application of antitrust to this stage will harm innovation. These arguments, however, do not capture the economic realities of innovation, which is multi-generational in nature.

In a somewhat similar vein, Daniel A. Hanley’s article argues that innovation is a not a universal societal good. Many innovations have not led to genuine social improvements. Instead, they often involve firms employing new tactics to coerce suppliers and distributors, and lawbreaking, with the explicit intent to undermine labor rights, privacy rights, and increase worker exploitation. As such, the article comments on how targeted antitrust enforcement can structure market competition to promote socially beneficial innovation.

Innovation matters in antitrust enforcement and the different ways in which it is defined, measured and, in general, understood, might bring different and sometimes opposing outcomes. As such, Aura Garcia Pabon argues that understanding what innovation actually is should be the first step. This question is increasingly relevant as competition authorities have intensified their interest in variables that go beyond mere prices. The article discusses how to define innovation for competition enforcement purposes and the challenges that arise when measuring it. While focused on mergers, this discussion also generally applies to potentially anti-competitive conduct.

Finally, focusing on merger control, Giovanni Morzenti argues that the ultimate effect of a concentration on innovation is determined by efficiencies, which can tip the balance between profit cannibalization and profit appropriability. The author argues that over recent decades, pre-merger notification requirements have become more lenient, allowing thousands of acquisitions of small innovative firms to avoid merger control. Evidence from the U.S. shows that non-notified mergers did not generate enough efficiencies to counterbalance their effect on market power, resulting in less innovation. A similar pattern has spread to several countries, contributing to a global rise in market power. Early steps have been taken to strengthen notification requirements in technology and pharmaceutical industries, but the author argues that regulators and should be ever vigilant.

In sum, the nexus between antitrust law and innovation is an evergreen topic. The articles in this Chronicle illuminate how competition is propelled by the driving force of innovation, but innovation can carry its own risk of social ills. Maintaining equilibrium between fostering new ideas and preserving robust competition is paramount.

As always, many thanks to our great panel of authors.


CPI Team

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