Antitrust, Innovation, and Competitiveness.

Hemphill, Thomas A.

To what extent does U.S. antitrust policy adversely impact technological and organizational innovation by American firms and thereby affect U.S. corporations' abilities to compete in the world economy? To explore this question, professors Jorde and Teece enlisted an eminent group of industrial organization economists and antitrust legal scholars to specifically address (in eight articles) the issue of why "U.S. antitrust policy did not seem to recognize how seminal innovation was to competition and to the U.S. standard of living (Preface)."

In the introduction, Jorde and Teece point out a basic axiom: professional economists are in nearly unanimous agreement that economic welfare is the goal of antitrust policy. The problem, as the editors view it, is that when antitrust policy is implemented it focuses on static analysis, i.e., single-time periods, where there is almost no reference to innovation and its importance to competition and overall economic welfare. Jorde and Teece believe that it is dynamic innovation and its subsequent rapid commercialization that are the major factors propelling national productivity improvement and the general economic welfare. Thus, when the courts have a choice to make in antitrust cases, the conflict should be resolved in favor of future-looking innovation over traditional static consumer welfare.

In "Innovation, Cooperation, and Antitrust," editors Jorde and Teece focus their attention on horizontal agreements among firms who are potential competitors and argue for a different approach to horizontal restraints. According to Jorde and Teece, the traditional view of the innovation process is characterized as a linear process--R&D through manufacture through marketing. The modern view of innovation, a dynamic view, involves more interdependencies, tighter linkages, and increased feedback among and between the functional areas. For reasons of cost, competence, and capacity, most firms lack the capacity to conduct all these activities alone.

Since the dynamic innovation process requires an increasing number of interfirm linkages and alliances, firms are exposing themselves to public and private antitrust treble damage actions. There are presently no Department of Justice guidelines and precious little case law to guide managers. Jorde and Teece believe that the courts presently have only murky rule of reason standards to guide them. The editors offer their own criteria for rule of reason analysis which includes the appropriability regime in which firms find themselves, the pace of technological change, the diversity of new sources of knowledge, the need to access complimentary assets and technologies, and the recognition that in high-technology industries competition commonly proceeds on the basis of product attributes, not price. As their prescription to this dilemma, Jorde and Teece offer an extension of the National Cooperative Research Act of 1984 as a "safe harbor" to exempt cooperative efforts to commercialize innovation.

In "Ignorance and Antitrust," the Honorable Frank Easterbrook identifies U.S. antitrust legislation as high risk, high delay litigation. According to Easterbrook, the litigation life-cycle is much longer than the product life-cycle in industries characterized by rapid technological change. He sees this issue as a serious impediment to U.S. global competitiveness.

Easterbrook considers ignorance and uncertainty as significant barriers to the implementation of effective antitrust jurisprudence. Specifically, this ignorance takes the form of poorly developed understanding of complex business behavior, such as in cooperative standard-setting arrangements, which involve efficient practices that often appear to be anticompetitive. In addition, unpredictable administrative and legislative factors, as in the assessment of potential competition, often complicate economic analysis and create greater uncertainty.

Easterbrook's antidote involves the courts creating simple, per se rules which would conserve on information and the costs of litigation, make greater use of the market power threshold, and employ administrative "safe harbors" to provide certainty and encouragement for business cooperation.

Antitrust analysis can benefit from having two complimentary conceptual lenses, says Oliver Williamson, for understanding complex organizations and business practices: applied price theory and transaction cost economics. In "Antitrust Lenses and the Uses of Transaction Cost Economics Reasoning," Williamson points out that the applied price theory approach comes close to arguing that prices and quantities are the only relevant data, while transaction cost analysis adopts a comparative contractual approach in which the transaction is the basic unit of analysis, and data on transaction frequency, the specificity of assets needed to support exchange, and uncertainty are reviewed. Applied price theory and transaction cost economics are necessary compliments to one another.

Transaction cost economics impacts innovation since the transaction cost paradigm focuses on uniqueness and the role of transaction specific assets, including knowledge. Williamson postulates that transaction cost economics is more sensitive to the various forms of complex contracts needed to support the innovation process, and the contractual dilemmas posed by weak appropriability. Integration, as a response to this problem, is viewed as a possible solution under the transaction cost paradigm.

Antitrust traditionalists will have serious reservations about the thrust of many of these articles, but the issue of faltering U.S. competitiveness has now been placed in the forefront of national priorities for public policy solutions. In this light, the antitrust laws and their economic premises require careful re-examination and, where warranted, modifications.

The concept of dynamic competition and the modern view of innovation (often requiring horizontal linkages between and among industry members) is better understood by America's European and Asian competitors. While the U.S. has offered limited antitrust exemptions (R&D) for cooperative ventures for economic/technical reasons or to promote international competitiveness, both the European Economic Community and Japan offer such exemptions through commercialization |1~.

Certainly, there is a strong public policy case offered for the position that where there is little evidence of significant market power in an industry, small and medium size U.S. firms should be allowed to engage in commercialization activities to better meet foreign competition. Establishing antitrust exemptions for this position, through administrative "safe harbors," will require a legislative mandate to guide firms, enforcement agencies, and the courts. With continued antitrust scholarship of this book's caliber, U.S. antitrust policy will eventually be brought "kicking and screaming" into the rapidly evolving global political economy.

Reference

1. Report of the President's Commission on Industrial Competitiveness, Global Competition: The New Reality, Vol. 2. Washington: U.S. Government Printing Office, 1985, p. 191.

@ @