Baker on Antitrust & Innovation

Josh Wright —  22 February 2007

Jonathan Baker (American) has a very interesting paper on a very hot topic in antitrust nowadays: the role of antitrust regulation in innovation.  The title is “Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation.” Here is the abstract:

The relationship between competition and innovation is the subject of a familiar controversy in economics, between the Schumpeterian view that monopolies favor innovation and the opposite view, often associated with Kenneth Arrow, that competition favors innovation. Taking their cue from this debate, some commentators reserve judgment as to whether antitrust enforcement is good for innovation. Such misgivings are unnecessary. The modern economic learning about the connection between competition and innovation helps clarify the types of firm conduct and industry settings where antitrust interventions are most likely to foster innovation. Measured against this standard, contemporary competition policy holds up well. Today’s antitrust institutions support innovation by targeting types of industries and practices where antitrust enforcement would enhance research and development incentives the most. It is time to move beyond the “on-the-one-hand Schumpeter, on-the-other-hand Arrow” debate and embrace antitrust as essential for fostering innovation.

Baker argues that antitrust is good for innovation despite what are sometimes competing effects because antitrust intervention can target “settings and categories of behavior where enforcement can promote innovation.” In other words, antitrust enforcement can focus its efforts in industries where the “good effects” dominate, i.e. antitrust promotes product market competition and innovation without a substantial reduction in post-innovation product market competition that would undermine the ex ante incentive to innovate. This is a reasonable approximation of the argument I think, but those interested in antitrust and innovation should go read the paper.

I’ve been working through the “competition and innovation” literature myself recently for a project I’ve been working on covering similar ground by exploring the economic basis (both in theory and empirically) for antitrust intervention in markets where innovation is important.  I suspect that Professor Baker and I might disagree about the details concerning how our economic knowledge maps into antitrust policy here, but this is an excellent and thoughtful addition to an important literature.  I will look forward to blogging more about my project when I have more to say about it.