Is Innovation King at the Antitrust Agencies? The Intellectual Property Guidelines Five Years Later

The Microsoft antitrust case focused public attention on the role of antitrust enforcement in preserving the forces of innovation in high-technology markets. Traditionally, regulators focused on whether companies artificially hiked prices or reduced output. Now, they're increasingly likely to look first at whether corporate behavior aids or impedes innovation. In this paper, we examine whether innovation has displaced short-term price effects as the focus of antitrust enforcement by the Department of Justice and the Federal Trade Commission and, to the extent that it has, whether enforcement actions are any different as a result. We also ask whether enforcement actions in the area of intellectual property and innovation have been consistent with the 1995 DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property [IP Guidelines]. Finally, we consider whether recent enforcement actions identify key areas in which additional guidance from the Agencies would be desirable. We address these questions first in merger cases and then in non-merger cases.

An Economist's Guide to U.S. v. Microsoft

We analyze the central economic issues raised by U.S. v Microsoft. Network effects and economies of scale in applications programs created a barrier to entry for new operating system competitors, which the combination of Netscape Navigator and the Java programming language potentially could have lowered. Microsoft took actions to eliminate this threat to its operating system monopoly, and some of Microsoft's conduct very likely harmed consumers. While we recognize the risks of the government's proposed structural remedy of splitting Microsoft in two, we are pessimistic that a limited conduct remedy would be effective in this case.

Innovation Matters

A proposal for moving from price-centric to innovation-centric competition policy, reviewing theory and evidence on economic incentives for innovation. Competition policy and antitrust enforcement have traditionally focused on prices rather than innovation. Economic theory shows the ways that price competition benefits consumers; and courts, antitrust agencies, and economists have developed tools for the quantitative evaluation of price impacts. Antitrust law does not preclude interventions to encourage innovation, but over time the interpretation of the laws has raised obstacles to enforcement policies for innovation. In this book, economist Richard Gilbert proposes a shift from price-centric to innovation-centric competition policy. Antitrust enforcement should be concerned with protecting incentives for innovation and preserving opportunities for dynamic, rather than static, competition. In a high-technology economy, Gilbert argues, innovation matters. Gilbert considers both theory and available empirical evidence on the relationships among market structure, firm behavior, and the production of new products and services. He reviews the distinctive features of the high-tech economy and why current analytical tools used by antitrust enforcers aren't up to the task of assessing innovation concerns. He considers, from the perspective of innovation competition, Kenneth Arrow's “replacement effect” and the Schumpeterian theory of market power and appropriation; discusses the effect of mergers on innovation and future price competition; and reviews the empirical literature on competition, mergers, and innovation. He describes examples of merger enforcement by US and European antitrust agencies; examines cases brought against Microsoft and Google; and discusses the risks and benefits of interoperability standards. Finally, he offers recommendations for competition policy

Market Structure, Organizational Structure, and R&D Diversity

We examine the effects of market structure and the internal organization of firms on equilibrium R&D projects. We compare a monopolist's choice of R&D portfolio to that of a welfare maximizer. We next show that Sah and Stiglitz's finding that the market portfolio of R&D is independent of the number of firms under Bertrand competition extends to neither Cournot oligopoly nor a cartel. We also show that the ability of firms to pre-empt R&D by rivals along particular research paths can lead to socially excessive R&D diversification. Lastly, using Sah and Stiglitz's definition of hierarchy, we establish conditions under which larger hierarchies invest in smaller portfolios.

A Review and Analysis of Electric Utility Conservation Incentives

During the energy crisis of the 1970s, consumers were responsible for energy conservation; today, a large part of the burden has shifted to the utility. Common energy saving schemes have proven inadequate, prompting state regulators to introduce demand-side management (DSM) incentives which reward either expenditures, savings, or net-benefits. DSM benefts are intended to induce investor-owned electric utilities to promote energy conservation aggressively. Stoft and Gilbert discuss the difficulties of estimating the net social benefit of an incentive program and examine how information influences regulators to select a particular incentive. Currently, most net-benefit incentives, while offering significant expected total rewards.for utility conservation activities, provide only a weak incentive fir conservation. This Article describes how these DSM programs can be tailored to achieve greater energy conservation

Product improvement and technological tying in a winner-take-all market

In a winner-take-all duopoly market for systems in which firms invest to improve their products, a monopoly supplier of an essential system component may have an incentive to advantage itself by technological tying; that is, by designing the component to work better in its own system. If the vertically integrated firm is prevented from technologically tying, then there is a pure strategy equilibrium in which the more efficient firm invests and serves the entire market. However other equilibria may exist, including a pure strategy equilibrium in which the less efficient firm invests and captures the market and mixed strategy equilibria in which each firm captures the market with positive probability. In contrast, if the vertically integrated firm is able to degrade the quality of its rival's system with a technological tie, and if the wholesale price of the essential component is insufficiently remunerative, then there is a unique equilibrium outcome in which the supplier of the essential component invests alone and forecloses a more efficient rival with an actual, or merely threatened, technological tie. A comparison of these equilibria for the two game forms demonstrates that a prohibition of technological tying can either increase or decrease social welfare depending on equilibrium selection

The effects of entry on incumbent innovation and productivity

How does firm entry affect innovation incentives in incumbent firms? Microdata suggest that there is heterogeneity across industries. Specifically, incumbent productivity growth and patenting is positively correlated with lagged greenfield foreign firm entry in technologically advanced industries, but not in laggard industries. In this paper we provide evidence that these correlations arise from a causal effect predicted by Schumpeterian growth theory—the threat of technologically advanced entry spurs innovation incentives in sectors close to the technology frontier, where successful innovation allows incumbents to survive the threat, but discourages innovation in laggard sectors, where the threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the United Kingdom. We control for the endogeneity of entry by exploiting major European and U.K. policy reforms, and allow for endogeneity of additional factors. We complement the analysis for foreign entry with evidence for domestic entry and entry through imports

Electric Field Enhanced Plasmid Delivery to Liver Hepatocellular Carcinomas

Electric field enhanced molecular delivery for cancer research and treatment is a new technology that has demonstrated its effectiveness in clinical trials using bleomycin or cisplatin (Heller, R., Gilbert, R., Jaroszeski, M. J. Clinical applications of electrochemotherapy, Advanced Drug Delivery Reviews 35,119-129, 1999), as chemotherapeutic agents. The technology is being investigated in research applications for applicability as a method to enhance gene expression in a target tumor. Success is predicated on an appropriate effective electric field mediated delivery protocol that triggers significant appropriate gene expression duration and levels. An electric field mediated delivery protocol includes a set of conditions associated with the electric field, the electroporation signature, as well as parameters associated with the plasmid and the electric field applicator. Manipulation of the electrical parameters within the electroporation signature generates different gene expression levels in liver hepatocellular carcinomas. Statistically significant gene expression levels were obtained that differed by an order of magnitude when two different electric field strength and duration conditions were employed

Strategic Considerations in Invention and Innovation: The Case of Natural Resources

Strategic considerations may induce a resource importing country to invent a substitute earlier than it intends to put it to use. There are also circumstances in which it would wish to delay an invention date even if it could obtain it at an earlier date at no extra cost. Similar paradoxical results obtain if resource cartels behave strategically. Setting prices high may be a way of deterring invention. If those engaged in R and D are not resource users, and the cartel has access to similar R and D technology, it will pre-empt rivals. This may not be the case if resource users can also engage in R and D