Antitrust key to innovation – otherwise disruptive firms can’t compete

We write in praise of market disrupters—firms that shake up the status quo, threaten incumbent firms, and sometimes transform entire industries. Through this process, which Joseph Schumpeter famously called “creative destruction,” disruptive firms promote economic growth and bring the benefits of new technologies and new business practices and business models to consumers.

We focus on the impact of antitrust policy—known globally as competition policy—on innovation.1 Competition policy seeks to protect and promote a vigorous competitive process by which new ideas are transformed into realized consumer benefits. In this fundamental way, competition spurs innovation. The productivity and growth literature teach us that innovation is the primary driver of rising standards of living over time, so promoting innovation through effective competition policy is likely to be very consequential for economic growth and welfare.

Disruptive firms drive a significant amount of innovation.2 They do not use the same technology or business model as incumbents. They offer consumers a distinct value proposition, not simply lower prices. By making its offer to customers attractive in a new way, a disruptive firm can destroy a great deal of incumbent profit while creating a large amount of consumer surplus. The resulting churn in products and market shares, as new products enter and old ones exit, and as newer business methods and business models supplant older ones, represents a healthy competitive process. If that competitive process is slowed or biased by mergers or by exclusionary conduct, innovation is lessened and consumers are harmed. This same competitive process promotes the development and diffusion of best practices, including what might be termed reductions in X-inefficiency. The trade and productivity literature both convincingly demonstrate that firms vary significantly in their productivity levels and that stiffer competition reallocates sales to more productive firms. The diffusion of best practices also is promoted if sales are contestable, going to the better-performing firms.

Patents aren’t even a close second – antitrust efforts to spur innovation are faster, more durable, avoid regulatory capture and promote the general welfare!

Hovenkamp 2015

Herbert J., Ben V. & Dorothy Willie Professor, University of Iowa College of Law. "Antitrust and the Patent System: A Reexamination" (2015). All Faculty Scholarship. 1820. https://scholarship.law.upenn.edu/faculty_scholarship/1820

Both antitrust policy and patent policy are properly concerned with economic welfare, although the concerns are articulated more clearly in antitrust than in patent law. At the atmospheric level, antitrust focuses on the short run, including such things as immediate pricing and output, while patent law is concerned with long run issues relating to innovation. But upon inspection this dichotomy quickly breaks down. In fact, antitrust policy has always been concerned with performance over both the short and long runs and often considers effects on innovation. Previous studies of antitrust law and the patent system have generally assumed that issued patents are valid, discrete, and generally of high quality in the sense that they further innovation. As a result, increasing the returns to patenting increases the incentive to do socially valuable innovation, whose gains must be traded off against the losses from patent exclusion. Ward Bowman addressed this tradeoff problem by presenting the patent as a kind of walled garden, protecting everything inside from antitrust scrutiny—provided that the activity remained inside the patent’s lawful scope. He concluded:

[E]valuating whether certain patent licensing practices should be sanctioned will involve the proper scope of the legal monopoly. Is more being monopolized than what the patent grants, or is the practice merely maximizing the reward attributable to the competitive advantage afforded by a patent?28

In the mid-1980s, Louis Kaplow proposed a “ratio test” that assessed antitrust practices by balancing “patentee reward” against “monopoly loss.”29 Kaplow himself recognized that the challenges in applying such a test are both “formidable” and “controversial.”30 Indeed, the relevant measurements required information about the optimal term of a patent.31 Not only is this term impossible to compute in litigation, it also varies considerably from industry to industry.32 If a patent or patent practice does nothing to further innovation, however, then any amount of social loss from increased monopoly is harmful. In that case, there is no additional benefit from innovation down the road. Because only a subset of patents are worthless, this naturally invites the question whether considerations of patent social value are a reasonable element of competition policy. Two premises drive the approach taken here. First, any resolution of patent/antitrust conflicts must be capable of judicial administration, although legislation can provide the relevant framework. This places the “patent social value” question out of bounds in most cases because it simply cannot be answered. Second, both antitrust and patent law are “regulatory” institutions, which respond to political as well as economic pressures. An approach to harmonization that assumes that patent law always “gets it right” will lead to significant errors, just as much as an approach that makes the same assumption about antitrust. Courts need to play the hands they are dealt, which are complex statutes that at least at the verbal level have surprisingly few inconsistencies. Further, judicial statutory construction is always subject to further congressional revision, as the history of both statutory regimes amply indicates. For example, in 1914, Congress responded with § 3 of the Clayton Act to what it viewed as an irrational lack of judicial concern about patent ties.33 It also responded to Supreme Court merger decisions in 1950 with expansions of the merger law.34 For its part, patent law was amended in 1952 in order to counter what Congress perceived as overly restrictive rules on patent issuance and excessively quick findings of misuse. It further limited misuse claims in 1988.35 In the current state of the law, antitrust is doing a better job of addressing the concerns within its domain than patent law is at addressing its concerns. Indeed, antitrust law is often a more effective promoter of innovation than our current patent system is. To be sure, at various points in their history both antitrust law and patent law have engaged in considerable overreaching. Beginning in the late 1970s, however, antitrust law went through a lengthy and still ongoing process of court-imposed discipline that has brought its rules more closely into alignment with its stated concern, which is increasing consumer welfare by promoting competition. Today, antitrust cases are far more difficult to win, the per se rule is less frequently used, and we have considerably heightened the requirements of allegation and economic proof.36 By contrast, patent law has continued on an expansion course that is only now showing some signs of abating. Patent law still awaits the consumer welfare revolution that to a large extent has already occurred in antitrust doctrine. Writing in the mid-sixties, Ward S. Bowman and Robert H. Bork warned of a “crisis in antitrust,” presaging the significant reform that was to follow.37 Today we are facing a similar crisis in patent law. This Article first examines antitrust and patent law as regulatory institutions with legislative authority to manage their given areas, but subject to limitations that all regulatory institutions face—namely, high cost, imperfect information, and special interest capture. One failed approach to this regulatory enterprise was the view that the patentee acts improperly when it engages in activity “beyond the scope” of the patent. The flip side is that activity that is not “beyond the scope” is permissible.38 A more sensible way to view the interaction between the patent and antitrust regulatory systems is to divide patent activity into two parts: pre-issuance and post-issuance conduct. Secondly, one must look for explicit statutory authorization of the conduct in question. Post-issuance conduct that is not statutorily authorized is generally amenable to antitrust scrutiny.39 Next, we examine the antitrust and patent systems as regulatory institutions, finding that today the presence of special interest capture is far stronger in the patent system than the antitrust system, although that may not always have been the case.40 After that, we turn to the very different ways that antitrust and the patent system approach economic policy and innovation. The antitrust system is empirical, market based, and acutely sensitive to the differences that exist among markets. In sharp contrast, the patent system is dominated by a much more myopic set of queries concerned with the boundaries of individual property rights and largely indifferent to market performance and diversity. If one thinks of the antitrust system and the patent system as tools for promoting economic growth and consumer welfare, antitrust has distinct institutional advantages.41