Antisocial innovation prevents functional free markets – pricing algorithms, patents, product hopping

3. Competition Harms. Some innovations are designed to harm the competitive process itself. Many innovations, of course, are created to give the inventor a competitive advantage.227 When superior new products or processes harm competitors but benefit consumers, that is typically a sign of healthy competition.228 The Google search engine, for example, resulted in the quick demise of lesser search companies like AltaVista and Ask Jeeves.229 But internet users were better off. The economist Joseph Schumpeter referred to this process as “creative destruction.”230 In some cases, though, innovations are employed to harm competitors in ways that do not make consumers better off.

Predatory pricing algorithms are an example of anticompetitive antisocial innovation. Lina Khan has argued that Amazon has used its sophisticated pricing algorithm to selectively undercut the prices of rivals selling on the Amazon marketplace in an effort to eliminate or co-opt competitors.231 But the threat of algorithmic predatory pricing is broader than Amazon. Indeed, Christopher Leslie has shown how pricing algorithms facilitate predatory pricing more generally.232 In particular, artificial intelligence can make price wars easier to win by allowing predatory firms to target their rivals’ customers for exclusionary below-cost pricing while continuing to profit off their own loyal customers.233 This type of algorithmic predatory pricing will harm competition and ultimately make consumers worse off. Firms can also use pricing algorithms to collude and raise consumer prices. For example, tenants’ groups have alleged that corporate landlords use a pricing algorithm offered by software company RealPage to inflate rental prices across the country.234 The U.S. Department of Justice weighed in on the tenants’ side, observing that “[t]oday, software algorithms can be employed to fix prices—and this modern machinery may be easier and more effective than past methods of price fixing.”235

In other instances, firms with market power alter their products to damage rivals. One setting where this occurs is when a firm produces a monopoly product that interconnects with complementary products. If the dominant firm also produces the complements in competition with third-party rivals, it might decide to alter its monopoly product to make it incompatible with competing downstream products. This was the allegation in C.R. Bard, Inc. v. M3 Systems.236 Bard manufactured biopsy guns for taking tissue samples.237 The guns required needles, which both Bard and third-party firms produced.238 Bard redesigned its guns so that they no longer were compatible with third-party needles.239 The evidence showed that the redesigned guns were no more effective than the older model.240 The design change—i.e., the innovation— was intended only to exclude Bard’s rivals.241

Altering products to harm competition is a common strategy in the pharmaceutical sector too. Firms with successful drugs whose patents are near expiration will sometimes modify the drugs in minor ways to extend their patent rights and exclude generic rivals poised to enter the market.242 For example, a drug maker might change the form of its drug, say from a tablet to a capsule, or alter the number of doses required by changing from an immediate-release to an extended-release formulation.243 These changes might offer no (or limited) real benefits to consumers, but the manufacturer is able to secure a patent on the new formulation and extend its ability to charge monopoly prices for the drug. This strategy, termed “product hopping,” has faced antitrust scrutiny in a number of cases.244

In each of these scenarios, firms create products that, while new, offer little or nothing in the way of consumer benefits. Instead, these innovations serve primarily to exclude competitors, ultimately making consumers worse off. One might argue that these types of product changes are not innovation at all. But, as we discuss below, antitrust law tends to treat any change to a product, unless it is

clearly not an improvement, as an innovation requiring immunity from liability.245