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Antitrust and Innovation

As today, economists and legal scholars thirty years ago were focused on the role of antitrust in the high-tech economy. But economists and legal scholars thirty years ago were, compared to too many of their counterparts today, far better informed about history, about the nature of government regulation (including, specifically, about antitrust), and about sound economics.

In a 1993 issue of Public Choice I reviewed an important 1992 volume on antitrust and innovation. This book should be dusted off and read today.

I paste the full text of my review beneath the fold (links added).

Thomas M. Jorde and David J. Teece (Eds.), Antirust, innovation, and competitiveness. New York and Oxford: Oxford University Press, 1992. Pages viii + 244. $39.95 (cloth).

Thomas Jorde and David Teece are well-recognized proponents of amending antitrust policies so that the effects of such policies on technical innovation are considered. In particular, these Berkeley scholars are concerned that U.S. antitrust enforcement discourages innovation. The papers collected in this volume make clear that this concern is justified.

In addition to a useful introduction by the editors, this volume collects eight papers presented at a 1988 conference at Berkeley. The purpose of this conference was to explore “the connections between competition policy and concern over U.S. competitiveness” (p. vii). The most noticeable feature of this volume is the consistent appearance of good sense, sound reasoning, and creative thought. In this reviewer’s opinion, such consistency in the antitrust literature remains rare, despite the general improvement in antitrust analysis over the past two decades. With only one exception, all papers make valuable contributions.

Phillip Areeda rightly characterizes antitrust as an industrial policy. However, he is too cavalier in describing this policy as “extremely highly decentralized” (p. 32) because it is carried out primarily by judges and juries rather than by bureaucrats. One benefit Areeda perceives of this decentralization is that it avoids the snares of interest-group politics: “antitrust law has the virtues of impersonal generality, nonpartisanship, and indifference to geographic impact” (p. 34). But Areeda has forgotten that the F.T.C. and the D.O.J. are bureaucracies. For example, as Faith, Leavens, and Tollison (1982) showed several years ago, the F.T.C. emphatically does not enforce antitrust with impersonal generality, nonpartisanship, and indifference to geographic impact (For more recent evidence of interest-group influence at the F.T.C., see Coate, Higgins and McChesney, 1990.) It is true that one can imagine a more centralized antitrust policy run by a bureaucracy whose actions are not subject to court review. However, the fact that U.S. antitrust policy is not as centralized as can be imagined does not mean that it is so decentralized as to be immune to political influences.

Areeda correctly recognizes that traditional notions of maximum price competition that still infuse antitrust rhetoric must be rethought to take account of the fact that innovation is an important dimension of rivalry. To the extent that there is a tradeoff between price competition and forms of nonprice competition, there is no reason to believe that maximizing the former is the optimal social policy.

This last point is developed in detail by Jorde and Teece, who argue effectively that cooperation among competitors is often necessary for socially useful innovative activity. These authors distinguish the traditional “serial” model of innovation from the “simultaneous” model. The latter model – quite realistic in today’s advanced economies – differs from the former model by recognizing “the existence of tight linkages and feedback mechanisms [within and between firms] that must operate quickly and efficiently” for successful innovation to occur (p. 49). Frequently, cooperation between two or more firms in the same industry is necessary to stimulate simultaneous-innovation activities. Unfortunately, existing antitrust law stifles such cooperation. Jorde and Teece propose workable legal devises that would encourage such cooperation without imprudently risking what in their view would be inefficient cartel behavior. Most notable among these proposals is their call for a “safe harbor” for types of cooperative behavior among firms in unconcentrated markets: Interfirm cooperative agreements involving less than 20 or 25% of a relevant market should be legal.

William Baumol and Janusz Ordover repeat a theme they have sounded elsewhere, namely, that antitrust is often a source of static as well as dynamic (“intertemporal”) inefficiencies. The potential gain to rent seekers from using antitrust as a club to beat competitors into docility is great. Predictably, antitrust has been used in this fashion. Among the solutions to this problem proposed by these authors is to make the costs of antitrust actions more symmetrical than they are at present. Regrettably, as matters now stand, a losing defendant can be required to pay the plaintiff’s costs, although a victorious defendant generally is unable to recover costs from a plaintiff. Baumol and Ordover also propose revisions in rules governing class-action suits in antitrust cases, restricting contingency arrangements with attorneys, and allowing victorious plaintiffs to recover only single damages (while the remainders of treble-damage penalties are paid by defendants to the government).

Richard Schmalensee argues persuasively that the per se rule against horizontal agreements is, in fact, dead. It has been replaced by a rule of reason. Evidence for this death can be found, for example, in the 1979 BMI case. In BMI, the Supreme Court upheld agreements among composers and music-publishing houses that set prices for blanket licenses for use of copyrighted music. The Court refused to find this horizontal agreement to be a violation of the antitrust laws because of the efficiency benefits it found flowing from these challenged agreements Schmalensee applauds this death of the per se rule. He proposes that courts condemn outright only those restraints that will do nothing except diminish output and raise prices. This proposal may remind some readers of Robert Bork’s proposal in The Antitrust Paradox (1978) that only “naked” (as opposed to “ancillary”) restraints be per se illegal. The difference between Schmalensee’s proposal and that of Bork is that Schmalensee apparently would exclude no legitimate efficiency defenses, even if the defendant is engaged in price fixing. Like Jorde and Teece, Schmalensee advances specific recommendations about how legal rules can be restructured to ensure better antitrust enforcement – an enforcement that is sensitive to the needs of competitors to cooperate if innovation is to take place.

The unavoidable absence of adequate knowledge by antitrust enforcers and courts prompts Frank Easterbrook to argue in favor of greater use of per se rules as well as market-power thresholds. Per se rules conserve on information needed to reach a decision. As such, these rules are valuable tools for courts. It is important to note that in Easterbrook’s opinion, per se legality is just as valuable in certain circumstances as is per se illegality in other circumstances. The rule of reason is not the only alternative to per se illegality. As Easterbrook correctly notes, “Society cannot endure an antitrust law in which heads-the-plaintiff-wins-tails-its-a-jury-question” (p. 130).

And as for market-power thresholds, Easterbrook understands that firms lacking market power are simply no threat to the competitive process. Whatever such firms do will either benefit consumers or these activities will grind to a halt under market pressures. Although other contributors to this volume recognize the usefulness of market-power thresholds, Easterbrook alone seems willing to use them without qualification. Surely Easterbrook is on to something: Firms lacking market power cannot plausibly engage in any set of activities falling within the purview of antitrust law that will harm consumers in the long run. Therefore, lack of market power should be a “trap door out of antitrust law” (p. 130).

Oliver Williamson resounds his familiar theme that a transaction-costs-economizing lens is a useful way to view business practices. Other frequently used lenses – the “hostile” lenses of Harvard and the applied-price-theory lenses of Chicago – cause analysts to overlook too much of what is really going on in complex business reality. The “hostile” and applied-price-theory lenses both focus on prices and quantities to the exclusion of other relevant dimensions along which competition takes place and efficiency considerations are relevant. Perhaps the greatest single benefit of a transaction-cost lens is t it allows detailed investigation into contracts. Contracts are seen primarily (though not exclusively) as efficiency-enhancing devices rather than as monopoly facilitators. At a minimum, Williamson’s approach thankfully abolishes the presumption that business practices not elaborated upon in price-theory texts are monopolistic. Consistent with the overall message of the book, Williamson rightly notes that innovative activities often require novel and complex contractual connections among firms. Antitrust enforcers and courts ought to be receptive to defendants’ claims that such contracts can serve legitimate purposes.

The only disappointment in the volume is the paper by Lawrence Sullivan and Ann Jones. This essay is a study in what Williamson calls the “hostile” approach to antitrust. Its presence in this volume is incongruous given Sullivan’s and Jones’s refusal to look beyond the static models that were the stock in trade of antitrust scholars two or three decades ago. Among the practices condemned by Sullivan and Jones are excessive capacity expansion, excess stockpiling of inputs, leveraging, and lease-only arrangements (p. 169). If these authors have any sensitivity to the complexities of business reality emphasized by Williamson, or the need for interfirm cooperation for successful innovation, they do not display it here. The result is a retrograde sermon for strict antitrust enforcement along lines that were familiar, say, in the 1960s.

The final essay is about patent law, not antitrust. Thus, this essay is also somewhat out of place in this volume. But Robert Merges’s and Richard Nelson’s contribution is fascinating. They take issue with Edmund Kitch’s theory of patents in which patents are analogous to rights to “mine” a “claim.” One important policy conclusion drawn by Kitch is that patents ought to be broad in scope in order to avoid overmining of the claim; the holder of the broad patent then has the incentive to govern access to the claim, thus promoting efficient innovative activity. Although they see some merit in Kitch’s perspective, Merges and Nelson believe that the more intense rivalry promoted by narrow patents yields net benefits greater than those identified by Kitch as flowing from broad patents. Although I am not yet persuaded that Merges and Nelson are correct in their empirical assessment, their argument is well developed and thought provoking.

The principal message in this volume is the need to restructure antitrust law so that innovative activities are not unduly stifled. Of course, this volume does not contain the last word on the matter – but it does contain some of the very best opening remarks in what is sure to be a long debate.

DONALD J. BOUDREAUX, Economics, Clemson University, Clemson, SC.


Coate, M.B., Higgins, R.S. and McChesney, F.S. (1990). Bureaucracy and politics in the FTC merger challenges. Journal of Law & Economics 33 (October): 463-482.

Faith, R.L., Leavens, D.R. and Tollison, R.D. (1982). Antitrust pork barrel. Journal of Law & Economics 25 (October): 329-34.