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
- 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