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Scholarship This essay is the introduction to a forthcoming volume entitled, Regulating Innovation: Competition Policy and Patent Law Under Uncertainty (Cambridge U. Press 2009 forthcoming). In . . .
This essay is the introduction to a forthcoming volume entitled, Regulating Innovation: Competition Policy and Patent Law Under Uncertainty (Cambridge U. Press 2009 forthcoming).
In addition to introducing all of the papers in the volume, this essay introduces the organizing themes of the volume. Innovation is critical to economic growth. While it is well understood that legal institutions play an important role in fostering an environment conducive to innovation and its commercialization, much less is known about the optimal design of specific institutions. Regulatory design decisions, and in particular competition policy and intellectual property regimes, can have profoundly positive or negative consequences for economic growth and welfare. However, the ratio of what is known to unknown with respect to the relationship between innovation, competition, and regulatory policy is staggeringly low. In addition to this uncertainty concerning the relationships between regulation, innovation, and economic growth, the process of innovation itself is not well understood.
The regulation of innovation and the optimal design of legal institutions in this environment of uncertainty are two of the most important policy challenges of the 21st century. Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors and foster economic growth. Unfortunately, as this essay describes, our tools for assessing these tradeoffs are limited.
Any coherent regulatory framework must take account of the low level of empirical knowledge surrounding the complex relationship between regulation – both through competition policy and patent law – and innovation, and the corresponding uncertainty caused by this absence of knowledge. The relationship between regulation and innovation has posed a significant challenge to antitrust economists at least since Schumpeter’s suggestion that dynamic competition would result in “creative destruction,” leading to a competitive process where one monopolist would replace another sequentially as new entrants developed a superior product.
Interfering in this dynamic process for the sake of static efficiency gains is perilous, but, of course, not impossible. But regulators and policy makers must take (more) seriously the condition of fundamental uncertainty in which they act, and the significant costs of their inevitable errors before justifying interventions on grounds of promoting competition or facilitating innovation.
This essay and the chapters in this book, approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers. The strength of this analysis – often described as the New Institutional Economic approach – is in its recognition that understanding economic performance requires not only economic modeling of narrow behavior, but also an understanding of that behavior in its legal, economic, social, and political institutional context.
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Scholarship The article, written jointly by a law professor and political science professor, endeavors to explain why the United States is particularly resistant to various efforts at international harmonization of antitrust law.
Although many states have advocated for the internationalization of antitrust laws, the United States has resisted a multilateral solution. We place the conflict over antitrust laws within the larger framework of international relations and draw out some novel implications of the debate by connecting the harmonization of international economic laws with the promotion of international peace and security. The harmonization of global antitrust laws is imbued with a political dimension that confers political benefits on the United States.
By crafting institutions in which other parties must alter their domestic political structures, the United States receives a credible commitment from other states of their willingness to bear the domestic costs of adherence to the specific agreement under negotiation, helping the United States identify potential allies. Separating budding friends from probable foes is a critical task of international security, and the United States derives political benefits from international agreements in a way that transcends the substance of the agreements themselves.
Scholarship Abstract When the winner of one auction gains a cost advantage in the next, bids reflect not only the value of winning the auction, but . . .
When the winner of one auction gains a cost advantage in the next, bids reflect not only the value of winning the auction, but also the value of gaining an incumbent advantage in future auctions. If a larger firm’s advantage derives from a cost or product advantage, it has a greater chance of holding onto incumbency status which, in turn, increases the value it places on gaining incumbency. As a consequence, larger firms bid more aggressively than their smaller rivals, where “size” is measured by the probability of winning. In this environment, mergers eliminate competition among the merged firms but they also change bidding behavior by both merging and non-merging firms. Computational experiments suggest that the scope for pro-competitive mergers is much wider than in auctions without an incumbent advantage. In particular, mergers among smaller firms are likely to be pro-competitive because they tend to create better losers, i.e., firms who bid more aggressively but still lose a large part of the time.
Scholarship Abstract This chapter surveys the legal and economic literatures on the antitrust analysis of tying arrangements and exclusive dealing contracts. We review the analytical framework . . .
This chapter surveys the legal and economic literatures on the antitrust analysis of tying arrangements and exclusive dealing contracts. We review the analytical framework applied under U.S. antitrust law to tying, bundling and exclusive dealing arrangements as well as the existing theoretical and empirical literatures.
Scholarship Abstract This chapter provides a survey of the law and literature on monopolization. The focus is American law, but the issues considered are equally applicable . . .
This chapter provides a survey of the law and literature on monopolization. The focus is American law, but the issues considered are equally applicable to European law. After briefly reviewing the history of monopolization law in the U.S., I review various approaches to the legal standard for monopolization suggested in the literature. I then attempt to model monopolization standards, and assess their desirability in light of error costs.
Scholarship Abstract In Weyerhaeuser v. Ross-Simmons the Supreme Court held that the predatory pricing standard adopted in Brooke Group also applies to predatory bidding claims, because . . .
In Weyerhaeuser v. Ross-Simmons the Supreme Court held that the predatory pricing standard adopted in Brooke Group also applies to predatory bidding claims, because the two types of predation are “analytically similar”. I argue that predatory bidding is likely to be more harmful to consumer welfare than is predatory pricing. Successful input market predation may lead to a “dual market power” outcome in which the firm has market power in both the input and the output market. In spite of the analytical distinction, consideration of error costs leads me to conclude that Brooke Group remains the best standard to apply to predatory bidding claims.
Scholarship Abstract This paper investigates a dataset that codes key features of the competition laws of 102 countries. It first compares the scope of the laws . . .
This paper investigates a dataset that codes key features of the competition laws of 102 countries. It first compares the scope of the laws overall, and of various subcomponents such as the law governing dominance, collusive conduct, and mergers. The second question examined in this paper is whether competition law has any effect on the intensity of competition within a nation. We find, in ordinary least squares regressions, that the scope of a country’s competition law is positively associated with the perceived intensity of competition in the country’s economy. However, we find no evidence that the scope of competition law is positively associated with an objective proxy of the intensity of competition. Moreover, instrumental variables regressions, though preliminary, do not indicate that the scope of competition law affects the perceived intensity of competition.
Scholarship Abstract The legality of nonprice vertical practices in the U.S. is determined by their likely competitive effects. An optimal enforcement rule combines evidence with theory . . .
The legality of nonprice vertical practices in the U.S. is determined by their likely competitive effects. An optimal enforcement rule combines evidence with theory to update prior beliefs, and specifies a decision that minimizes the expected loss. Because the welfare effects of vertical practices are theoretically ambiguous, optimal decisions depend heavily on prior beliefs, which should be guided by empirical evidence. Empirically, vertical restraints appear to reduce price and/or increase output. Thus, absent a good natural experiment to evaluate a particular restraint’s effect, an optimal policy places a heavy burden on plaintiffs to show that a restraint is anticompetitive
Scholarship In this article we examine the use of business documents to prove antitrust violations. Such usage has long occurred in the courts and regulatory agencies. More recently, there has been a scholarly effort to justify the use of such documents and the rhetoric they contain in antitrust analysis.
This Article considers the implications for antitrust law and policy of the relationship between business rhetoric and economic analysis. We maintain that antitrust analysis should remain firmly rooted in economics and that courts must be wary of the role of business rhetoric in antitrust analysis and adjudication. This is not to say that “market realities” reflected in business documents and testimony should not be considered in antitrust cases. Rather, courts and policy makers should recognize the distinction between the market realities themselves and expressions or characterizations of those realities for legally irrelevant business purposes. An important implication is that regulators’ and courts’ reliance on business documents is misplaced, and much of this material should be excluded from consideration by courts.
