The counterplan creates an updated antitrust framework to spur innovation---solves case.

Innovation competition plays an increasingly important role in the economy, displacing more traditional forms of price competition. Antitrust enforcement has recognized these developments and increased its focus on technological change. Antitrust policy makers are placing greater emphasis on innovation in evaluating competitive conduct, licensing of intellectual property (IP), and mergers. The issue is whether antitrust policy makers have the right tools for the job. Incorrect economic analysis of innovation competition risks impeding competition, mischaracterizing anticompetitive activities, and discouraging welfare-enhancing innovation. In this article, I point out that economic frameworks applied by antitrust policy makers have not kept up with the growth of innovation competition. I find that antitrust policy makers need to update their economic frameworks to evaluate competitive and anticompetitive conduct when there is innovation competition. I argue that antitrust policy makers should take advantage of significant developments in the Economics of Technology & Innovation that address the rise of innovation competition.

Innovation has become the dominant mode of competition, driving greater antitrust scrutiny of innovation. What I have termed the ‘Business Revolution’ is driving digital automation of retail, wholesale, finance, supply chains, manufacturing, services, technology transfers, and other transactions.1 Digital platforms are improving the efficiency of transactions and creating new markets yet are raising concerns about privacy and exclusion.2 Companies engaged in innovation competition continue to shift investment from plant and equipment toward invention and innovation. Intangible assets’ contribution to the market value of leading publicly traded companies overshadows that of tangible assets, expanding from only 15 per cent of their value in the 1970s to over 90 per cent of their value.3 A large part of the economy participates in the production and distribution of knowledge.4 The number of specialized scientific and technical personnel engaged in Research and Development (R&D) is expanding rapidly.5 Nearly every part of the economy benefits from advances in general purpose technologies (GPTs) such as Information and Communications Technology (ICT), mobile and broadband communications, artificial intelligence (AI), cloud computing, processing of big data, virtual and enhanced reality, robotics, Additive Manufacturing (AM), and the Internet of Things (IoT).6

Antitrust enforcement is likely to encounter innovation competition both at and within the frontiers of technological change. Antitrust policy makers view conduct that diminishes innovation as anticompetitive. For example, Microsoft’s proposed acquisition of Activision Blizzard raised questions about the effects of the merger on innovation in video games and digital markets. In Illumina, the FTC argued against the vertical merger on the grounds that access to upstream technology would foreclose rival innovation in downstream product markets.7 The FTC alleged that Grail would gain an advantage in the downstream market for cancer detection tests by acquiring Illumina. Illumina developed DNA sequencing technology that helps with cancer detection tests. FTC senior counsel Susan Musser pointed out that ‘Grail is in an ‘innovation race’ to develop and market its early-detection test’.

Antitrust policy makers recognize that the economic benefits of innovation can justify some anticompetitive conduct, as in Microsoft.9 Conversely, antitrust policy makers can find conduct to be anticompetitive even if carried out by highly innovative firms.10 The Department of Justice and eleven state Attorneys General considered innovation competition in their antitrust complaint against Google.11 The complaint alleged that by favoring search advertising and its own products, Google excludes third parties because it ‘raises their costs, reduces their competitiveness, and limits their incentive and ability to invest in innovations that could be attractive to users’.12 The complaint against Google expressed concerns that the company’s ‘anticompetitive practices harm competition and consumers, reducing the ability of innovative new companies to develop, compete, and discipline Google’s behavior’.13 The House of Representatives offered legislative proposals collectively titled ‘A Stronger Online Economy: Opportunity, Innovation, Choice’ to address market power in the digital marketplace with an implicit focus on Amazon, Apple, Facebook, and Google.14 One of the bills, the Platform Competition and Opportunity Act, states as its purpose ‘[t]o promote competition and economic opportunity in digital markets by establishing that certain acquisitions by dominant online platforms are unlawful’.15

Antitrust policy makers unfortunately approach many of these twenty-first century technological challenges with a twentieth century economics toolbox. The early economics background of antitrust is well known. Antitrust policy relied on perfect and imperfect competition models. Antitrust policy applied the structure–conduct–performance (SCP) paradigm that mechanically predicted competitive conduct and industry performance based on market structure, that is, the number and size of firms.16 The Chicago School challenged this approach based on economic efficiency, as illustrated by Robert Bork’s highly influential book The Antitrust Paradox.17 Applications of game theory in the field of Industrial Organization (IO) offered a better understanding of imperfect competition in the 1980s.18 My 1989 book Regulation and Markets examined implications of advances in IO for the design of regulatory and antitrust policy.19 Empirical studies of IO beginning in the 1990s provided antitrust policy makers with advanced techniques for estimating the effects of market power, product differentiation, market entry, and mergers.20

Antitrust policy cannot properly evaluate innovation competition with traditional economic concepts based only on price competition and stationary technology. Antitrust policy can cause significant efficiency losses by giving more weight to short-term consumer welfare effects and less weight to larger long-term economic benefits of innovation. To better address innovation competition, antitrust policy should reduce its reliance on the twin economic frameworks of perfect competition and imperfect competition. The perfect competition framework imposes an unrealistic ideal standard of conduct that assumes price-taking behavior and static technology. The imperfect competition framework provides inaccurate guidance based on IO models of short-term price competition, again without technological change. Antitrust policy makers cannot treat innovation competition by analogy to price competition, that is, by relabeling innovations as competitive or predatory.21 Antitrust policy makers cannot fix this problem simply by citing Joseph Schumpeter’s classic works on innovation.22

The shortcomings of these frameworks have led to criticism of the use of economic analysis in antitrust policy. Lina Khan, now Chairman of the Federal Trade Commission (FTC), states ‘the current framework in antitrust—specifically its equating competition with ‘consumer welfare’, typically measured through short-term effects on price and output—fails to capture the architecture of market power in the twenty-first century marketplace’.23 Advocates of neo-Brandeisian antitrust target big tech and mergers, echoing past characterizations of large firms as ‘the curse of bigness’.24 Tim Wu argues that the Chicago School’s ‘focus on “allocative efficiency” yielded almost no consideration of the “dynamic” costs of monopoly, like stagnation or stalled innovation.25 As Daniel Sokol points out, however, ‘a structural fix like Wu recommends would hurt innovation’.26 Antitrust enforcement that abandons economic analysis protects neither competition nor innovation.

Antitrust policy makers should apply twenty-first century advances in the Economics of Technology & Innovation.27 The present discussion of the Economics of Technology & Innovation is not meant to be complete, but rather seeks to suggest some important concepts that are helpful for antitrust policy. Innovation competition generates new forms of competitive and anticompetitive conduct. Competitive conduct involves creative non-price instruments that implement technological change. Innovation competition occurs when companies introduce something new to the marketplace, improving transaction methods, product features, and production processes.

Economic analysis can be applied to consider the relationship between innovation competition and antitrust enforcement.28 Economic analysis identifies how the extent of the market determines the quality of innovation.29 Economic models examine how firms compete through R&D.30 Innovation competition frameworks address competition among inventors and the creation of IP.31 Innovation competition frameworks also include the explosion of the literature on digital platforms and two-sided markets.32 Innovation competition frameworks recognize that firms are not outside the economy but rather are established by entrepreneurs, as I explain in The Theory of the Firm.33 Innovative entrepreneurs generate startups and establish firms when incumbent firms experience inertia that limits innovation.34 Innovative entrepreneurs also are necessary when there are significant costs of transferring IP and inventors have tacit knowledge.35 Innovation competition frameworks acknowledge the critical importance of IP and technology markets.36 Innovation competition frameworks include economic models of technology standards and standards development organizations (SDOs).37

In the present discussion, I examine various areas in which economic frameworks can help antitrust policy makers address innovation competition. First, antitrust policy makers should consider economic models that better identify anticompetitive conduct and help evaluate the benefits and costs of technological change. Companies compete by developing transaction methods that lower transaction costs and improve market performance. Companies also compete by creating improved product features to achieve vertical product differentiation. In addition, companies compete by implementing more efficient production processes to achieve cost advantages.

Secondly, antitrust policy makers should apply new developments in the economics of innovation by better understanding how IP affects innovation competition. Antitrust and IP policies have been at odds for well over a century.38 Innovation competition helps reconcile the seemingly inconsistent objectives of promoting competition and promoting innovation. With innovation competition, promoting competition increases innovation and promoting innovation increases competition. Maximizing consumer welfare and economic efficiency demands greater coordination between Antitrust and IP. Harmonizing Antitrust and IP requires more than finding an optimal trade-off between competition and innovation. Antitrust should recognize that IP protections are procompetitive rather than sources of market power. Antitrust enforcement should be strengthened by addressing IP infringement as anticompetitive conduct.

Thirdly, antitrust merger policy should not simply consider the effects of mergers on market shares or investment in R&D. Antitrust policy should apply economic models that consider how mergers affect innovation competition and technological change. Economic analysis of the effects of competition on innovation can be adapted to evaluate how mergers affect incentives to invent and to innovate. When competition increases incentives to innovate, then mergers may adversely affect innovation. However, when competition decreases incentives innovate, mergers may be beneficial for innovation, generating greater consumer benefits over time. The Horizontal Merger Guidelines (HMGs) highlight innovation competition and mention innovation twenty times.39 The HMGs consider how competition affects incentives to innovate and whether mergers will affect innovation by combining complementary capabilities.40