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

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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
Updated December 20, 2023