RBB Brief 54 ‘An innovative leap into the theoretical abyss: Dow/DuPont and the Commission’s novel theory of harm’

This paper contradicts the paper below. It describes how, in Dow/DuPont, the Commission  adopted an innovation theory of harm that is based on a much broader concern than before: namely, that the parties would find it profitable to reduce overall R&D investments post-merger, causing a reduction in the number of innovative pesticide products (as yet unidentified) at some unspecified time in the future.  It then describes the old approach of the Commission, which was concerned with late stage pipeline products. It notes that the assessment of: “a pipeline product (for which practically all the innovation work has been done) and an existing product is substantively no different to the assessment of a merger between two already existing products. In both of these cases, the concern is that the internalisation of the constraint between the rival products may give the merged entity an incentive to increase prices or reduce output, perhaps even discontinuing one of the products altogether to avoid cannibalisation of…

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…

Simcha Barkai ‘Declining Labor and Capital Shares’

In this paper,  the author argues that the decline in the labour share of the economy has not been offset by an increase in the capital share in the US. Over the last 30 years we have witnessed a large decline in the labour share of gross value added. There have been many explanations advanced for this – such as technological change, mechanization, capital accumulation, changes in the relative price of capital, trade-offs between labour and capital – in which  the decline in the labour share is offset by an increase in the capital share. The author disputes this view, and argues that instead there has been a large increase in the profit share in the U.S. non-financial corporate sector over the last 30 years. The paper begins with a review of the literature on the decline of the labour share, and describes how that literature tends to explain that this decline has been off-set by an increase in the capital…

Jan De Loeckery and Jan Eeckhout ‘The Rise of Market Power and the Macroeconomic Implications’ (2017) NBER Working Paper No. 23687

In this paper – which can be found here – the authors look at a number of issues that have become a staple of the macro-economic literature of late (i.e. the economy is experiencing a fundamental long term change which manifests itself in a number of trends such as declining labour shares, declining wages, declining labour force participation, slowdown in labour market dynamism, decreased job mobility, lower migration rates, and lower growth). They  argue that while many explanations have been proposed for each of these secular trends, all these developments are consistent with one common cause that hitherto has remained undocumented:  the rise in market power since 1980. After the introduction – where the argument is very clearly outlined – the paper is structured as follows: In Section 2, they explain why mark-ups are an important measure to identify market power in this context. They also identify the data sources and develop an empirical framework to identify industry mark-ups. The…

David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reene “The fall of labour share and the rise of superstar firms” NBER Working Paper No. 23396

This paper – which can be found here – focuses on the “fall of labor’s share of GDP in the United States and many other countries in recent decades”. Why does this matter for competition law and policy? Because this phenomenon seems to be associated with the rise of “super-star” firms and increased market concentration – something that we kind of take for granted in the digital sector, but not necessarily elsewhere. The paper starts by noticing that, while there is a consensus that the labour share has been declining over the past few decades, there is a lively debate on what are the causes of this recent decline. The two main likely culprits are: (i) the fall in the cost of capital relative to labour; (ii) trade and international outsourcing – i.e. labour shares have declined the most in industries that were strongly affected by increasing imports (e.g., from China). However, the authors argue that none of these explanations…

Herbert Hovenkamp ‘Antitrust Policy and Inequality of Wealth’ (2017) CPI Antitrust Chronicle, October, at 1

This paper – which can be accessed here – begins from the observation that antitrust law unquestionably has consequences for the distribution of wealth. Rigorous antitrust enforcement can make price-fixers and monopolists worse off while benefiting their customers (or, sometimes, their competitors). However, the redistributive consequences of competition law are limited. As such, the question is: why would one want to use antitrust as a wealth distribution device when far more explicit statutory tools are available for that purposes, including tax law, minimum wage laws, welfare laws, etc.? Hovenkamp advances a number of possibilities: (i) given its reliance on vague and open standards, antitrust allows one to use the judicial or administrative process without having to obtain legislative permission; (ii) a good deal of literature suggests that competitive markets are conducive to a more even distribution of wealth. To the extent this is true, we might use antitrust to equalize wealth distribution simply by making markets more competitive – but…

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…