Competition and Innovation

Innovation and Economic Growth and Competition Policy & Antitrust

Article Snapshot

Author(s)

Richard Gilbert

Source

Journal of Industrial Organization Education, Vol. 1, Issue 1, Article 8, 2006; Chapter in Issues in Competition Law and Policy, Wayne Dale Collins, ed., American Bar Association Antitrust Section, 2006

Summary

This paper looks at how mergers affect research and development (R&D) and product innovation.

Policy Relevance

Mergers sometimes lead to more innovation, but there is little evidence that monopolies innovate more. How R&D affects consumers is complex and hard to predict.

Main Points

  • The Department of Justice and the Federal Trade Commission now challenge mergers in sectors that spend a lot on R&D partly because of concerns about innovation.

  • Problems with innovation analysis include difficulties predicting the outcome of R&D:
    • Some innovations come from outsiders; though new medical treatments are unlikely to come from a firm not researching the disease.
    • Reducing the number of firms can increase R&D and lead to new products; it  does not necessarily mean less diversity in R&D.

  • Economic forces shaping innovation include: 1) Profits from new products, especially if copying is limited by rights like patents; 2) High profits from old products can discourage innovation; 3) Benefits from gaining advantages over rivals, e.g. by lowering costs; 4) Benefits from discouraging new rivals.

  • When innovations are protected as trade secrets—usually for processes, not products—several firms can discover and use an innovation and must share the benefits. R&D might be lower, or fragmented.
    • Studies show mergers can help consumers by avoiding duplicative R&D, when firms wastefully duplicate one another’s discoveries.

  • When innovation is protected by patents, competition can encourage R&D, especially for drastic innovations that make existing products obsolete. In theory a monopolist could profit more from innovation, especially to forestall rivals.

  • Studies show:
    • More competition from imports increases labor productivity, perhaps due to innovation.
    • Leading firms find it hard to innovate to stop new entry and this is rare.
    • For product innovation, R&D grows with larger business unit size, not firm size, suggesting that Schumpter is wrong to say monopolies innovate more.

  • Regulators should consider 1) the intensity of competition among firms for existing product; 2) whether the innovation is a major improvement; 3) Whether the innovation lets a monopolist profit from selling both the new and old product-otherwise, competition is likely to improve innovation; 4) that leading firms are unlikely to succeed in using innovation to stop new rivals.

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