Richard J Gilbert - Innovation Matters: Competition Policy for the High-Technology Economy

Current antitrust enforcement has its priorities backwards the promotion of production and innovation efficiency should be the first economic goal of antitrust policy.

Joseph F. Brodley, The Economic Goals of Antitrust: Efficiency, Consumer Welfare, and Technological Progress (1987)

There is widespread concern that competition is not working for the high-technology economy. Dominant firms supply many information, computing, and internet services. Business creation has slowed. Venture capitalists shun start-ups that would compete with the major digital platforms. Firms that dominate high-tech industries have managed to acquire or eliminate many potential competitors. Politicians on the left and the right are demanding more aggressive antitrust enforcement, including breaking up high-tech titans or limiting their operations to prevent them from discriminating against firms that rely on their services.

Some lay the blame for the failure of competition in the high-technology economy on misguided antitrust enforcement, which has been captured by economic arguments that equate consumer welfare with low market prices. There are calls to replace this consumer welfare standard with alternative approaches that allow a broader consideration of the effects of policies on dimensions other than price, such as jobs, privacy, inequality, and the concentration of political power.

A focus on consumer welfare has been a stabilizing influence for antitrust enforcement. Alternative goals are often less precise or they admit policies that do not benefit consumers in the near term or in the more distant future. The main thesis of this book is that antitrust enforcement has to change to address challenges to competition in the high-technology economy, and that positive change can occur without sacrificing a focus on consumer welfare. The answer is to move from price-centric to innovation-centric competition policies. The transition will require a different emphasis in antitrust enforcement, different analytical approaches, and substantive changes to methodologies and presumptions that have been adopted by the courts that enforce the antitrust laws.

Antitrust agencies have taken steps to address innovation in their enforcement decisions. In 1993, General Motors (GM) proposed to sell its Allison Transmission Division to ZF Friedrichshafen AG. The companies were two of the worlds largest manufacturers of automatic transmissions for large trucks, buses, and other commercial and military vehicles. At the time, I was the Deputy Assistant Attorney General for Economics in the Antitrust Division at the US Department of Justice (DOJ). There were serious concerns in the Division about the transaction, but they did not fit into the usual enforcement boxes. Although Allison and ZF competed in Europe, ZF was only a minor manufacturer of medium- and heavy-duty automatic transmissions for vehicles sold in the US. Because ZF had a small share of sales in the US, the transaction was unlikely to have a very large effect on the prices paid by US customers.

But lawyers and economists in the Antitrust Division had a different concern: The merger (technically, an acquisition of GMs Allison Division by ZF),) The GM-ZF transaction, if allowed to occur, would have denied US buyers the benefits of new or improved products that both GMs Allison Division and ZF would have had an incentive to develop if they remained independent.

The DOJ challenged the proposed merger. The complaint emphasized harm to innovation as well as traditional adverse price effects. In its complaint, the Antitrust Division defined an innovation market, which included Allison and ZF as two of the most important competitors engaged in research and development (R&D) for automatic transmissions used in large trucks, buses, and other commercial and military vehicles, and alleged that the merger would create a near-monopoly in the innovation market and reduce incentives to innovate. The parties abandoned their proposed merger in response to the complaint.

The GM-ZF merger challenge caused a stir in the staid antitrust community. Some accused the Antitrust Division of ignoring accepted antitrust principles by losing its traditional focus on price effects. Others railed that too little was known about innovation incentives to admit such concerns into the antitrust policy sphere. Despite these objections, the merger protected innovation incentives for automatic transmissions used in large trucks and buses, which is what we would expect today from developments in economic theory and empirical research on market structure and innovation.