Giulio Federico, Gregor Langus, Tommaso Valletti “A simple model of mergers and innovation” (2017) CESifo Working Paper Series 6539, CESifo Group Munich

This paper, while simple, has some significant (and charged) conclusions. They purport to demonstrate that: (i) merging parties always decrease their innovation efforts post-merger while outsiders to the merger respond by increasing their effort; (ii) a merger tends to reduce overall innovation; (iii) consumers are always worse off after a merger; (iv) the model calls into question the applicability of the ‘‘inverted-U’’ relationship between innovation and competition to a merger setting. The argument goes as follows: A merger between competitors affects the incentives to innovate through two channels: (i) the first channel relates to the (negative) externality that innovation by one firm has on its rival firms. A merger allows the merging parties to partially internalize this innovation externality and thus it lowers the incentives to innovate for the merged firm; (ii) the second channel relates to product market competition. This is relaxed after the merger so that profits increase both when firms do and do not innovate. A highly stylized…

Wolfgang Kerber and Benjamin R. Kern ‘Assessing Innovation Effects in US Merger Policy’ (2016) Journal of Industry, Competition and Trade 16(3) 37

This paper presents the results of a (quantitative) empirical study on how the US antitrust authorities assessed mergers in regard to their innovation effects from 1995 to 2008. It is structured as follows: Section 2 contains a brief overview of the theoretical and empirical literature in economics about innovation effects. The particular characteristics of innovation processes – which lead to the unpredictability of outcomes arising from innovation processes, and the possibility that important (even revolutionary) innovations can emerge entirely unexpected from anywhere – have raised the question of whether policy-makers have enough knowledge about the determinants of innovation to adopt policy instruments for promoting innovation. The paper also covers the Arrow-Schumpeter-Aghion debate on the relation between competition and innovation, which I am not going to repeat here. More interestingly, the authors review the model-theoretic literature about the relation between competition and innovation, and distinguish between different groups of models. In the first group of modles, the innovation incentives of firms are…

Rachel Brandenburger, Logan Breed and Falk Schöning ‘The Role of Innovation in Merger Control’ (2016) CPI July (1)

This paper argues that role of innovation in merger control is a hot topic because “recent statements and enforcement actions on both sides of the Atlantic reflect the agencies’ growing emphasis on innovation in their merger investigations and decisions”. The paper provides an overview of these developments. The paper begins by providing an overview of the context in which this increased focus on innovation is taking place. First, because technological development is now fundamental to business success in so many industries, assessing the impact of mergers on innovation now plays a key role in merger control. Second, innovation is at the heart of wider policies, such as the “Europe 2020 strategy” and the US’ “Strategy for American Innovation”. The paper then moves to the more interesting topic of how innovation has been taken into account in practice by enforcement agencies. In Europe, the European Commission has focused on the effects of a merger on innovation in a number of decisions…

Herbert Hovenkamp ‘Antitrust and Information Technologies’ 2017 Fla. L. Rev. 68 419

This is a polished version of a lecture given by Hovenkamp last year, and it can be found here.  As the name indicates it provides an overview of “the relationship between competition policy and the technologies of information.” A first section looks at the relationship between digital technology and market power. In particular, digital technology affects the way firms exercise market power and also creates serious measurement difficulties. A pervasive problem in analysing power in digital markets is that sellers typically have a very high ratio of fixed to variable costs. This entails that prices must be considerably above short-run marginal cost to be profitable. As a result of this, many traditional measures of market power produce unacceptable false positives. These measures include the Lerner Index and other tools derived from it, but are not limited to them: “None of the antitrust tools for assessing power is particularly sensitive to the presence of fixed costs”. He thus concludes that antitrust…

Angela Daly ‘Beyond Hipster Antitrust:  A Critical Perspective on the European Commission’s Google Decision’ (2017) European Competition and Regulation Law Review 1(3) 188

The argument of this article – which can be found here – is straightforward: “competition law as it stands is not well-equipped to address (all of) the problems a very large concentration of private power such as Google poses to Internet users. However, unlike the ‘antitrust hipsters’, it is argued that reform to competition law is insufficient – other areas of law and regulation may be more appropriately employed to ensure user autonomy in these circumstances.” The paper begins with an extremely cursory analysis of the Commission’s decision in the Google case. Since the decision is not yet published, the paper relies on comments from the Competition Commissioner that there was an abuse because Google: “promoted its own comparison shopping service in its generic search results, and demoted the results of its competitors, with the effect that competitors were ‘denied… the chance to compete on the merits and to innovate’ and European consumers were ‘denied… a genuine choice of services…

Herbert Hovenkamp ‘Antitrust and Innovation: Where Are We and Where Should We Be Going’ (2011) Faculty Scholarship 1832

This old paper – which can be found here – deals with a constant concern in Hovenkamp’s work, namely the interaction between IP and antitrust. He notes that: “The primary purpose of antitrust law is to promote competition. However, both antitrust law and intellectual property law for large parts of their history have worked so as to undermine innovation competition by protecting too much. Antitrust policy often has reflected exaggerated fears of competitive harm and responded by developing overly protective rules that shielded inefficient businesses from competition at the expense of consumers. By the same token, the intellectual property laws have often undermined rather than promoted innovation by granting intellectual property holders rights far beyond what is necessary to create appropriate incentives to innovate.” Given this, what should antitrust’s stance be as regards innovation in general, and IP in particular? Hovenkamp offers “a few principles for antitrust analysis in innovation-intensive markets, particularly those claims that involve the exercise of patent rights.”…

Raphael De Conink ‘Innovation in EU Merger Control’ (2016) Competition Law & Policy Debate 2(3) 41

This paper – which can be found here – argues that these a consistent framework for taking account innovation is necessary in EU merger control. The article is structured as follows: Section 1 refers to recent Commission decisions addressing the impact of mergers on innovation. In particular, the Commission has been more interventionist in recent pharmaceutical mergers, such as in Novartis/GSK Oncology and in Pfizer/Hospira, and requested divestments of pipeline products – including, in some cases, products at an early stage of development. The Commission has also stressed the need to protect innovation as a rationale for divestment in other technology-driven industries, most recently and prominently in the context of the GE/Alstom. Section 2 summarises some of the economic evidence and debate on this topic. We are treated to a review of the literature on competition and innovation. There is a wealth of empirical analysis addressing the potential effects of competition on innovation. While the insights of such research do…

Reinhilde Veugelers ‘Innovation in EU merger control: Walking the talk’ Bruegel Policy Contribution 2012/04, February 2012

This relatively old paper – which can be found here – argues that the Commission makes all the right sounds on innovation, but it is not putting its “talk” into practice. Few cases have been actually examined for their innovation effects, and even in these few cases innovation effects have not been decisive for the ultimate competition assessments. In particular, verifiability seems to be a major constraint for DG COMP, preventing it from fully incorporating innovation effects into its analyses. The paper begins with a review of how the Commission took innovation claims into account in merger control assessments up until 2012. This section concludes that, while the Commission can take efficiencies into account as part of its substantive analysis of the consequences of a merger – usually to counterbalance perceived anti-competitive effects –, the evidence is that the Commission has made little use of this option. On the basis of the limited sample of cases where efficiencies were explicitly…

Nicolas Petit ‘Significant Impediment to Industry Innovation: A Novel Theory of Harm in EU Merger Control?’ ICLE Antitrust & Consumer Protection Research Program White Paper 2017-1

This paper – which can be found here – discusses a novel theory of harm applicable in EU merger control (Nicolas Petit ‘Significant Impediment to Industry Innovation: A Novel Theory of Harm in EU Merger Control?’). Under this theory, the Commission can intervene in mergers that reduce innovation incentives in an industry as a whole. The author considers that this theory focuses on identifying on Significant Impediment to Industry Innovation (“SIII”). This paper first attempts to describe the content and extent of the SIII theory. Second, it attempts to show that the SIII theory is a marked departure from established EU merger control practice. Third, it discusses the economic foundations of the SIII theory. Finally, it puts forward best practices for the assessment of mergers in R&D intensive industries. We will now look at each in turn. SIII theory provides that a merger can and should be prohibited where it can be demonstrated that it will “lead to a reduction of innovation” in a…

John Taladay ‘Measuring the Impact of Injunctive Relief on Innovation’ (2017) Antitrust Chronicle Vol. 1 · SPRING 2017

This paper – which can be found here –  focuses on the impact of injunctions, or more specifically the lack of the availability of an injunction, on an innovator’s investment decision. It argues that; “(1) it is possible to measure the impact that a “no injunction” in patent infringement actions will have on innovation investment, and that (2) such a policy will necessarily reduce investment in innovation. The reduction in investment is caused by the delay in receipt of licensing revenues that will result from eliminating the potential for injunctions, because this delay will negatively affect the inventor’s expected return on investment.” It also holds that “that interest awards [as an alternative to injunctions] are inadequate to eliminate the reduced incentive to invest in innovation.” The paper begins with a disquisition of the relationship between IP and antitrust. “Antitrust and intellectual property law are often said to be compatible in that they are both supposed to encourage innovation. The intellectual…