Antitrust and Innovation: Welcoming and Protecting Disruption

Giulio Federico, Fiona Scott Morton, Carl Shapiro

Chapter in NBER book Innovation Policy and the Economy, Volume 20 (2020), Josh Lerner and Scott Stern, editors (p. 125 - 190)
Conference held April 16, 2019
Published in December 2019 by University of Chicago Press
© 2020 by the National Bureau of Economic Research
in NBER Book Series Innovation Policy and the Economy

The goal of antitrust policy is to protect and promote a vigorous competitive process. Effective rivalry spurs firms to introduce new and innovative products, as they seek to capture profitable sales from their competitors and to protect their existing sales from future challengers. In this fundamental way, competition promotes innovation. We apply this basic insight to the antitrust treatment of horizontal mergers and of exclusionary conduct by dominant firms. A merger between rivals internalizes business-stealing effects arising from their parallel innovation efforts and thus tends to depress innovation incentives. Merger-specific synergies, such as the internalization of involuntary spillovers or an increase in the productivity of R&D, may offset the adverse effect of a merger on innovation. We describe the possible effects of a merger on innovation by developing a taxonomy of cases, with reference to recent U.S. and E.U. examples. A dominant firm may engage in exclusionary conduct to eliminate the threat from disruptive firms. This suppresses innovation by foreclosing disruptive rivals and by reducing the pressure to innovative on the incumbent. We apply this broad principle to possible exclusionary strategies by dominant firms.

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Document Object Identifier (DOI): 10.1086/705642

This chapter first appeared as NBER working paper w26005, Antitrust and Innovation: Welcoming and Protecting Disruption, Giulio Federico, Fiona Scott Morton, Carl Shapiro
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