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One solution that encourages innovators and entrepreneurs to take the risk of failure has been to allow them to be bought by larger, established corporations. In some sectors, like defense, buying innovative start-ups is a primary source of innovation. Two decades ago, when the United States was more comfortable with the lead it and its allies had over China in technology, dismantling the current innovation system in pursuit of hypnotical gains may have been a tolerable risk, but that is no longer the case. That means the FTC and Department of Justice (DOJ) antitrust effort need to be subsidiary to larger strategic concerns and made as part of decisions on national security, particularly as some actions (such as blocking acquisitions and partnerships between start-ups and big tech firms) will likely have a chilling effect on the U.S. innovation system.

Another tradeoff is possible future gain in exchange for potentially immediate loss. There is good research on how antitrust measures can increase innovation, but the effect is not immediate. This makes competition different from early antitrust episodes (Standard Oil or AT&T) in that the issue is not purely domestic, the United States cases an aggressive competitor, and there is risk that in the time it would take for the U.S. innovation system to recover from antitrust action, China would pull irreversibly ahead. This kind of irreversible loss of position has been an element of industrial competition among great powers since the 1900s and must be avoided.

So, how should U.S. policy, particularly antitrust, treat large, sophisticated, and powerful technology firms, given this new fiscal reality? On one side are those who argue that breaking up or taking other aggressive antitrust actions against leading U.S. technology companies will only strengthen China’s hand by enabling its companies to compete against hobbled U.S. technology corporations. The argument goes that big American companies, who have the revenues to fund R&D and other investments, will weaken, if not crumble, if the antitrust cudgel is applied to them, as many have in the past under similar antitrust enforcement.

On the other side are the anti–big business, neo-Brandeisians and their leader, Federal Trade Commission Chair Lina Khan. Khan and her allies seek to transform the U.S. economy into one that is dominated by small and mid-sized firms—or, in industry sectors where scale economies or technological complexity makes that impossible, into one that is operated or heavily regulated by government.

Venture capital is the fuel for high-growth startups that have transformed the world. Recent examples include Moderna and Zoom, and past examples include Genentech and eBay. VCs partner with entrepreneurs to build companies. This includes incubating a company within a venture firm, investing in a founder with merely an idea and a business plan, or providing capital and expertise to propel a company as it grows.

For venture-backed companies there are effectively three outcomes: standalone company (often via initial public offering); merger or acquisition; or bankruptcy. Company failure is the most common outcome, but the success stories are often hypergrowth companies with a big impact. Many entrepreneurs and their investors begin the company building process with the hope of creating a standalone, public company. However, in most cases an IPO is not possible, and the preferred exit opportunity becomes an acquisition by another company, with 58% of startups expecting to be acquired.1 Ultimately, approximately 10 times as many startups are acquired than complete an IPO, with 836 venture-backed companies having been acquired in 2019, whereas 82 went public.2

Out of the frying pan, into the fire. That old refrain describes America’s economy after COVID and during our current wave of inflation. But as companies and entrepreneurs struggle, some politicians are pushing for antitrust laws that would undermine American business competitiveness and security.

The antitrust bills being considered in Congress would, among other things, prohibit select US platforms from promoting their products on their own sites, break up integrated digital tools, require open-door interfaces, and prohibit mergers of a certain size.  

But are these theories correct? Is there really a free-market monopoly problem? Assuming that we can even define what we mean by a “free-market monopoly,” it would certainly follow that firms in a free market would have the freedom to attempt to monopolize (control the entire supply of) some raw material, product or service. But whether they would be able to restrict market output for any reasonable period of time is debatable.

First, such attempts (mergers, buying up available supplies of raw materials) can be prohibitively expensive, even unprofitable, and therefore unlikely.

But those patents didn’t lead to successful products. Commercialization did not increase in the treated markets, (and there was no difference between low- and high-market-share complementors.) What’s more, we found that most everyone’s profits declined — especially those of complementors with low market shares, who, in theory, should have been the beneficiaries of the antitrust action. Despite being the most innovative of the bunch, they failed to thrive. In contrast, the bigger players who had been nipping at Microsoft’s heels did not patent significantly more after the antitrust settlement than they had before, but they didn’t see the drastic profitability decreases either. If anything, because they did not increase their investment in innovation, the big players seem to have benefited most from the antitrust case against Microsoft by becoming more efficient, not more innovative.

And finally, although regulators might have hoped to see new companies enter the treated markets, it didn’t happen. The number of firms moving into the markets, we found, did not increase following the settlement, another consumer-benefiting outcome that failed to materialize.

If firms in free markets can really monopolize in restraint of trade, the empirical evidence should reside in the many classic antitrust cases brought over the last 100 years. Yet an examination of some of the most famous of these classic antitrust cases reveals that the firms indicted and (mostly) convicted were generally increasing market output, lowering market prices, and innovating.

Standard Oil of New Jersey (1911)

Very little evidence, however, indicates that antitrust law affects the rate of innovation. There are three possibilities. Antitrust enforcement could strengthen incentives to innovate. It could, however, also diminish them: If firms believe that aggressive innovation is likely to draw unwanted attention from regulators, their motivation to invent new goods and methods could wane. And as a practical matter, the courts are probably ill equipped to create incentives for technological advancement. The third possibility is that innovation and antitrust have no causal relationship.

In fact, scholarship has often noted how little is known about antitrust’s influence on innovation. Despite the literature’s efforts—employing case studies, formalized logic, and theoretical explorations—“the consensus is that there is no clear answer.” Professor Alan Devlin remarked, “[u]nfortunately, the specific antitrust policies that best promote technological advancement are far from clear.” Professor Marina Lao found that “there is neither empirical nor clear theoretical support for the hypothesis that monopolistic conditions, relative to competition, encourage more innovation.” One commentator summed up these efforts, stating that “we may not be confident that antitrust suits enhance innovation, but we cannot be confident that they retard [harm] it either.”

There is much to criticize about government meddling in the tech market. Tech has spurred productivity growth and created a bounty of new products in recent decades. Many of these products are free and digitization has by and large reduced costs compared to non-internet alternatives or predecessors. Arguments that the U.S. tech sector is not competitive disregard changes in prices across different economic sectors, while government regulatory barriers and labor intensiveness explain high prices in areas like education and housing.

Nonetheless, calls to expand antitrust are growing. One thrust is to promote digital startup competition. In recent years, competitive process scholars like Columbia’s Tim Wu and Lina Kahn (now appointees of the Biden administration), Yale’s Fiona Scott Morton, and former Federal Trade Commission economist Jonathan Baker have written books and articles suggesting that judicial emphasis on price and output in exclusionary conduct cases is particularly ill suited to the digital economy. They propose that courts alter how they weigh procompetitive and anticompetitive effects when evaluating vertical integration and vertical contractual restraints. They also suggest removing the below-cost and recoupment requirements for predatory pricing exclusion claims.

On December 11 of last year, the Federal Trade Commission filed suit to block a partnership between Sanofi and Maze Pharmaceuticals to develop a drug for Pompe disease, a partnership that the government said threatened “to deprive patients of a new, innovative treatment.” In fact, the anti-trust policy, intended to promote innovation, could disrupt the development of “life-saving, essential care.”

It is often said that small companies are not simply miniature versions of their larger brethren. Nowhere is that more clearly demonstrated than in the pharmaceutical industry, where the entrepreneurial community serves as a principal source of new medicines. The commission’s approach, designed to prevent the manipulation of markets by the largest corporations, could have the opposite effect of discouraging competition in the market for innovation.

But the arguments for the role of antitrust law in regulating collusion are not arguments for policing privateering activity in and of itself. This is simply a natural extension of the longstanding proscription against collusion between competitors or anticompetitive mergers - a proscription unique to the specialized laws of antitrust. The fundamental problem with most popular and academic arguments calling for antitrust intervention is that they fail to recognize this distinction, and in turn the limitations inherent to antitrust law. These limitations may be quasi-constitutional, such as the Noerr-Pennington doctrine, 170 or they may be practical, such as proving intent under Section 2. 171 Superimposed on these limitations is the notion - supported not only by academics but also the Supreme Court - that when an alternative regime to antitrust law is available, efficiency considerations dictate that antitrust's role should be minimized. 172

This is to say nothing of the more generalist arguments in favor of a limited role for antitrust law. Antitrust violations are ultimately felonies, after all, so practices condemned by antitrust law "should not be … just over the line," but "so clearly beyond the pale … as to be subjects of strong condemnation." 173 Given the highly broad and open text of the actual antitrust statutes, this is a particularly salient concern for voluntary compliance and clarity. 174 The particularly high cost of false positives - not only the direct costs of treble damages but also the inducement of rent-seeking activities - coupled with judges' lack of economic or industry expertise suggests minimizing the role of antitrust law as mere business regulator. 175 In short, there is good reason to be skeptical "about courts' ability to separate good conduct from bad" and "modest[] about what [antitrust] laws can do well." 176 These arguments are convincing in their own right. But they mostly serve here to highlight the fact that conduct without a clear anticompetitive [*224] valence - such as unilateral usage of privateering - should not be curtailed by antitrust laws where alternatives are available.

But Mr. Biden is missing a crucial opportunity to push back against corporate power. To make a lasting change in the enforcement of antitrust laws, he needs to borrow a page from President Ronald Reagan’s playbook and put antitrust experts on the federal bench.

Mr. Reagan suspended the government’s efforts to check corporate power, adopting instead a policy best described as nonintervention in the life of large corporations. He made it stick, too. Since then, even Democratic administrations have treated antitrust law as obsolete.

Second, antitrust laws are fluid, nonobjective, and often retroactive. Because of murky statutes and conflicting case law, companies never can be quite sure what constitutes permissible behavior. Conduct that is otherwise legal somehow morphs into an antitrust violation. Normal business practices—price discounts, product improvements, exclusive contracting—become violations of law. When they’re not accused of monopoly price gouging for charging too much, companies are accused of predatory pricing for charging too little, or collusion for charging the same.

Third, antitrust is based on a static view of the market. In real markets, sellers seek to carve out mini-monopolies. Profits from market power are the engine that drives the economy. So, what might happen in a utopian, perfectly competitive environment is irrelevant to the question whether government intervention is necessary or appropriate. The proper comparison is with the marketplace that will evolve if the antitrust laws, by punishing success, eliminate incentives for new and improved products. Markets move faster than antitrust laws could ever move. Consumers rule, not producers. And consumers can unseat any product and any company no matter how powerful and entrenched. Just ask WordPerfect or Lotus or Polaroid.

“Do Patents Really Promote Innovation? A Response To The Economist,” Forbes, https://www.forbes.com/sites/marshallphelps/2015/09/16/do-patents-really-promote-innovation-a-response-to-the-economist/?sh=37bb19c31921

Economists have repeatedly demonstrated that inventors are driven primarily by the expectation of profiting from owning the rights to their inventions. Zorina Khan of , whose 2005 classic The Democratization of Invention: Patents and Copyrights in American Economic Development was awarded the prestigious Alice Hanson Jones Prize for outstanding work in economic history, observed that “Ordinary people [are] stimulated by higher perceived returns or demand-side incentives to make long-term commitments to inventive activity.” She also found that “their patterns of patenting were procyclical [and] responded to expected profit opportunities.”

While patent expiration has important impacts on parties other than the patentee, it also significantly affects the incentives and behavior of the patentee itself. Here again, most of the relevant studies focus on the pharmaceutical industry. Not surprisingly, one response of firms facing patent expiration is to engage in strategic behavior to extend exclusivity with little or no new innovation.138 Pharmaceutical patentees engage in “lifecycle management” by launching “authorized” generics prior to patents expiring on their brand drugs, practicing “evergreening” by which they patent incremental variations of a base drug, and obtaining FDA approval for new uses of existing drugs for which patents will soon expire.139 Pharmaceutical companies facing impending patent expiration have also engaged in “reverse payment” settlements with generic companies to delay the latter’s entry into the market.140 In other cases, firms facing patent expirations engage in mergers and acquisitions to shore up market share and revenues while actually decreasing aggregate expenditures on R&D.141 In short, impending patent expiration can motivate patentees to extend exclusivity in minimally innovative (and sometimes innovation- dampening) ways.142

Importantly, however, patent expiration can also motivate patentees to continue innovating. In this sense, impending expiration provides the constant pressure to innovate at the heart of churn. Technology firms are ongoing concerns that assume debts, lease facilities, and build up reliance interests on the expectation of continued revenue streams sustaining their operations. While the unit of analysis in patent law is usually a single innovation, a dynamic view of business lifecycles reveals that no technology firm can long sustain itself with just a single innovation. Furthermore, given the long time required to develop innovations and the probability that many of them will fail, firms cannot wait for a key patent to expire before initiating the next round of research and development. Rather, expiration of the patent term provides an impetus for established firms to innovate continuously.

MIT Sloan study shows the power of patents to impact innovation

Winners of patent races conduct 14% more follow-on research

All three branches of government behave as though an innovative nation requires not only strong intellectual property protection but also freedom from antitrust restriction, while a consumer-friendly marketplace requires both the strict enforcement of pro-competition antitrust laws and the limitation of patent rights in the face of those laws. In this Part, we argue that this understanding is too limited and that, in fact, both policies promote the same goals. In the words of former FTC Chair Timothy Muris: "Properly understood, IP law and antitrust law both seek to promote innovation and enhance consumer welfare." 147 The two legal areas are interdependent-each relies on consistency and proper calibration in the other realm in order to fully achieve its own goals. We acknowledge that the two realms sometimes come into conflict and, in these instances, one must yield to the other. But patent law is fairly specifically spelled out in statute, and antitrust law is an expansive regime with "very few cracks";148 therefore, the government can implement a policy vision through enforcement choices. Instead of favoring one area at the expense of the other, courts and agencies should enforce antitrust law with an eye toward the balance between competition and company protection that Congress has enshrined in the patent law.

A. Scholarship at the Intersection

In the present study, we elucidated that the formation of a market monopoly can be prevented by antitrust intervention into a firm’s patent consolidation while encouraging the development of follow-on innovation. Our conclusion suggests further elaboration on the modern understanding of the relationship between antitrust and patent laws is necessary, at least when it comes to innovation. The two laws become complementary when the right to access the substituting patents on an upstream technology is distributed across innovators; when the patents are owned by a single firm, complementarity between antitrust and patent law may not work. This implication echoes the ongoing policy and scholarly discussion on how the modern antitrust law should accommodate technological innovation (Katz and Shelanski, 2005; Khan, 2016; Sidak and Teece, 2009). Thus far, the discussion concerning the necessity of accommodating the Schumpeterian view on the relationship between market competition and innovation has been largely theoretical. Moreover, how the antitrust law plays a role in promoting technological innovation remains an open question. Our study suggests that firms’ patent consolidation through patent transfer is one of the venues where antitrust law enforcement can shape market competition and technological innovation. This implication also indicates the importance of extending the scope of antitrust intervention into “patent-only” transfers in cooperation with patent policymakers to promote market competition and technological innovation.

In response to this saga of laws in tension, courts and commentators began to argue that antitrust and patent law were more properly viewed as complementary, because ―both are aimed at encouraging innovation, industry and competition.‖3 In their recent report on antitrust, IP, and innovation, the antitrust enforcement agencies argued that: [A]ntitrust and intellectual property are properly perceived as complementary bodies of law that work together to bring innovation to consumers: antitrust laws protect robust competition in the marketplace, while intellectual property laws protect the ability to earn a return on the investments necessary to innovate. Both spur competition among rivals to be the first to enter the marketplace with a desirable technology, product, or service.4 So antitrust and patent law both try to stimulate innovation: the former by stimulating competition, and the latter by temporarily suppressing it.5

We have two conceptions of the relationship between antitrust and patent: in tension or complementary. In reality, both conceptions have an element of truth, but antitrust and patent are neither always in tension nor always complementary. Rather, the relationship is multidimensional. Antitrust law and patent law are in tension in some contexts, particularly in the short run. For example, a patent holder can exclude infringing competitors from the market, even if the competitors can make the product more efficiently. In the long run, after the patent expires, consumers can purchase the innovation in a competitive marketplace.

Current Relationship Between Antitrust And Intellectual Property Law

Today, the federal antitrust enforcement agencies recognize a much closer and interconnected relationship between antitrust law and intellectual property rights.(14) The FTC and DOJ no longer consider the two bodies of law to conflict. The agencies' current thinking is summarized quite well in the Federal Circuit's 1990 opinion in Atari Games Corp. v. Nintendo of America, Inc., in which the Federal Circuit stated: "[t]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are complementary, as both are aimed at encouraging innovation, industry and competition."(15)