Antitrust, it is said, is good at increasing allocative efficiency and bringing prices down to cost. In the process, however, antitrust reduces incentives to creators who would like to sell at a higher price. Enter IP, which in the words of the underrated IP commentator Abraham Lincoln “adds the fuel of interest to the fire of genius, in the discovery and production of new and useful things.” The result is the current model, where antitrust is pretty much relegated to policing the walls of the IP kingdoms (or prisons, depending on your point of view) from the outside, with no say as to what happens on the inside or where the boundaries should be drawn.
In Beyond Schumpeter vs. Arrow, Jon Baker takes a hard look at both the Schumpeter conjecture, according to which large firms and monopolists are likely to be more innovative than firms in competitive markets and Arrow’s claim that competition rather than monopoly promotes innovation. The current stalemate position is emblematically expressed in the “inverted U” distribution of innovation: least in competitive markets, most under oligopoly conditions, and somewhat less under monopoly. Baker surveys and ultimately dismisses the various studies that tried to link the rate of innovation to concentration, because “the most grave difficulty was in isolating the effect of competition.”
One industry might be particularly innovative for a number of reasons other than the extent of pre-innovation competition. Technological opportunities may be great: scientists and engineers may see ways to improve computer chips but not ways to improve potato chips. Or firms may have greater guarantees they will be free from post-innovation competition, for example because they expect broad intellectual property protections or because their prior success gives them an advantage in keeping customers. It turned out to be virtually impossible to separate out possibilities like these from differences in the extent of competition when comparing one industry with another, so researchers could not practically exploit cross-industry comparisons to tell whether and how competition mattered. Recently, several economists motivated by concerns among researchers working in the field of endogenous growth theory have made an heroic effort to address many of the problems with the earlier cross-industry studies, and in doing so appear to have resurrected the “inverted U” result. But the modern studies still do not control satisfactorily for differences across industries in the extent and rate of growth of technological opportunity and in the conditions of appropriability.
Some of the studies were only able to control for industry effects in two-digt SIC industries, “which are so broad as to be little better than no controls at all.” Baker concludes:
As a general rule competition does not just lead firms to produce more and charge less; it encourages them to innovate as well. Competition supplies a powerful motive for innovation.
On that “pro-competition” note, Baker’s paper concludes with suggestions for antitrust enforcement policy:
[A]n antitrust enforcement program crafted to promote innovation would seek to protect product market competition in “winner-take-most” or “winner-take-all” markets; protect product market competition in markets in which probable technological or regulatory developments or rapid growth in demand largely determine the extent of future product market competition; attack direct reductions in innovation competition; challenge “naked” horizontal agreements to fix prices or allocate customers; prevent agreements among rivals to engage in conduct facilitating coordination with no plausible business justification; and challenge horizontal mergers likely to reduce product market competition.
Mark Lemley, in A New Balance Between IP and Antitrust, also argues for competition as the primary engine of innovation.
[W]e must treat IP and antitrust law as equals. The current approach treats IP rights as having primacy within their established boundaries, and relegates antitrust to the role of policing departures from those boundaries. This is evident in a variety of Federal Circuit opinions, not only in the misuse context (where it is perhaps understandable) but in assessing fundamental questions such as the legality of conditional refusals to deal involving patents. While there is clearly logic to this framework– the grant of a patent must confer some rights on its owner that it would not have had in the absence of that grant, and antitrust should not interfere with those core rights–it is directly responsible for the cycles of over- and under-protection that have characterized the IP-antitrust interface. When patent rights get stronger, we want antitrust to get stronger to prevent abuses of the right; instead, it recedes, as it must in any system where its powers are determined by the bounds of the patent right. Similarly, when the patent owner’s rights are narrowed, the antitrust “sea” floods in to fill the gap, even though the risk of monopolistic abuse has been reduced.
Both papers are short and to the point, perfect for a flight from NY to DC.
Technorati Tags: antitrust, IP
RSS Feed
