Antitrust & Innovation: a Reawakening of Interest

Originally published in Antitrust Quarterly

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This article formed the text of a presentation made on October 18, 2002, in Brussels at the Hawksmere conference on "Latest Developments in EU and US Competition Law."

Introduction

The changing views over the last 100 years of policy makers on whether or not antitrust laws can have an encouraging or discouraging effect on innovation is important to the evolution of antitrust laws. After introducing some theoretical concepts and an historical overview, I consider some practical applications of the issues arising and offer a concluding remark. Interest in this old subject varies over time and it may be that we are approaching a watershed in its development.

I want first to define our terms. I am using "antitrust" in its increasingly commonly used form, namely that body of US antitrust law and EC competition law, effectively a generic term. "Innovation," according to my dictionary, means "to introduce change and new ideas." This definition leads me to raise two points. First, I am not restricting myself to the concept of "innovation markets." Second, by innovation I do not limit myself to "high tech." Old tech industries are involved in innovation. However, the high tech industry is clearly central and leading much of the antitrust and innovation debate. It is interesting in this context that even in 1996 the European Commission noted that there were more ex officio investigations opened by the Commission in high tech industries than in any other industry.1

Theory

Consideration of the theory immediately presents problems because there is no single theory. To facilitate the description, however, the theories fall into two broad schools: (1) laissez faire and (2) interventionist.2 The strongest proponent of the first of these was the economist Joseph Schumpeter, whom I will deal with later. I mention him now to raise the point that although he proposed his theories on this topic in the 1940s, those theories formed an important plank in Microsoft's defence both before the Department of Justice ("DOJ") in the US and before the European Commission in the EU. The laissez faire school believes in the non-intervention by government in the market and that concentration within an industry may be beneficial to innovation. The intervention school believes that concentration in industry dampens the incentive to innovate.

Historical Context

Given the long history of antitrust jurisprudence in the US, it is to the US that I first turn for an historical overview. An appropriate starting point is the year 1890 and the enactment of the Sherman Act. The period from 1890 to 1930 can be described as the formative years. Seminal cases were ruled upon (e.g., Standard Oil) and institutional structures created (the Federal Trade Commission ("FTC") was born). During this period, the interplay between antitrust and innovation was an important topic, and was connected to the topics of corporate trust and patent rights. Its importance reverberated into politics, even to the extent of being relevant to the 1912 Presidential election. Woodrow Wilson won and created the FTC. He came from the interventionist school, as the following quotation shows:

"If you want to know how brains count, originate some invention which will improve the kind of machinery [the trusts] are using, and then see if you can borrow enough money to manufacture it. You may be offered something for your patent by the corporationó which will perhaps lock it up in a safe and go on using the old machinery; but you will not be allowed to manufacture."

Arguably, an effect of antitrust on industry at that time, which favoured corporations rather than cooperation between competitors, was the creation of centralised laboratories, of which Bell Laboratories is still an active example.

The next period for antitrust and innovation is the years 1930-1970, which can be regarded as a period of intervention. A joint study in 1941 by the FTC and the Temporary National Economic Committee compared process innovation among companies and found that "the largest companies made, on the whole, a very poor showing." A lone voice in this period which favoured concentration within industry was the economist Joseph Schumpeter. He argued, in essence, that firms in concentrated markets, even monopolists, will, on balance, be incentivised to invest in long-term, large scale R&D, because they need not worry about imitators and can, therefore, fully benefit from their investments. They are also incentivised because if they do not continually innovate, others may quickly substitute them using a radical innovation. Schumpeter focused on innovation because he regarded investment in innovation as central to success. In his view of the world, companies engage in dynamic competition...