Innovation Markets Analysis: When Should This Tool Come Out of the Shed?

Innovation Markets Analysis:
When Should This Tool Come Out of the Shed?

Presented at the Panel on Non-Price Competition/Innovation
Workshop on Merger Enforcement
Federal Trade Commission
February 18, 2004

Steven C. Sunshine
Jonathan M. Lave

Overview

• Innovation is an important dimension of rivalry and engine of progress.
• Predictions of a merger's effect on innovation output are uncertain.
• Legal and economic issues require showing of probable effect on output
  • Genzyme: example of insufficient evidence of effect?
• Practical application may be infrequent and more likely in certain industries.

Innovation markets are not easy to define with confidence

• Sources of innovation are difficult to identify
• Strength and significance of population of innovators are unclear
• Type of innovation may be relevant to confidence in market boundaries

Predicting competitive effects requires an assessment of merger's effect on innovation and output

• Structure as a means of predicting performance
  • Who is right, Schumpeter or Arrow?
  • The problem and necessity of case-specific evidence
• Innovation efforts and incentives
  • Incremental v. revolutionary
  • Nature of competition between innovations
• Confidence that the reduction in innovation will lead to an output effect
• Is the effect outweighed by innovation efficiencies?

Enough about economics. What about the law?

• Does Section 7's focus on "line of commerce" of commerce doom innovation analysis?
• Can a plaintiff prove a nonspeculative effect in a reasonable amount of time?
• Burdens and do they really matter?
  • Burden of proof always on plaintiff
  • PNB/Baker Hughes, burdens of production, and the prima facie case

Problems of the investigator

• Investigator has a duty to evaluate proposed transactions. If innovation is a key dimension of competition, then the investigator must deal with it
• The law - with the state of economic theory - requires the investigator to prove all aspects of the case, including:
  • the innovation space in which the diminution will occur
  • the merger's likely effect on innovation
  • the manner in which output will be reduced
  • when the output effect will be felt
• The importance of empirical evidence from the merging parties and the market cannot be overstated.

Suggested mode of analysis

• Is innovation an important dimension of rivalry?
• Will innovation affect existing product market in a reasonable amount of time?
  • competitive effects in a goods market
  • potential competition
• Can the boundaries of the innovation market be determined?

Suggested mode of analysis (cont.)

• Does the merger lessen incentives to innovate?
  • nature of competition between merging parties
  • nature of other downstream competition
  • efficiency analysis
• Can harm to an output market be demonstrated?
  • future goods markets
  • future improvements to existing goods