Antitrust, Multi-Dimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?

Josh Wright —  2 September 2009

My essay on economics, innovation, and antitrust, forthcoming in Manne & Wright’s forthcoming volume on Regulating Innovation: Competition Policy and Patent Law Under Certainty (introductory chapter available here), is now available on SSRN.  The essay is a revisiting of a fundamental challenge Harold Demsetz offered to antitrust decades ago that I believe has gone, from a methodological perspective, largely unanswered.  The point primary point in Demsetz’s analysis was that when different dimensions of competition were negatively correlated, economics offered limited insight into how to translate shifts in the “mix” of competitive activities into changes in economic efficiency or other welfare measures of interest (total welfare, consumer welfare, etc.).  In the essay I explore this point in light of recent advances in economic theory and empirical knowledge, as well as policy implications.  Here’s the abstract:

Harold Demsetz once claimed that ‘economics has no antitrust relevant theory of competition.’ Demsetz offered this provocative statement as an introduction to an economic concept with critical implications for the antitrust enterprise: the multi-dimensional nature of competition. Competition does not take place upon a single margin, such as price competition, but several dimensions that are often inversely correlated such that a liability rule deterring one form of competition will result in more of another. This insight has important implications for the current policy debate concerning how to design antitrust liability standards for conduct involving both static product market competition and dynamic innovative activity. The primary purpose of this essay is to revisit Demsetz’s broader challenge to antitrust regulation in the context of the frequently discussed tradeoffs between innovation and price competition. I summarize recent developments in our knowledge of the relationship between competition and innovation, highlighting the deficiencies that significantly constrain antitrust enforcers’ abilities to confidently calculate inevitable welfare tradeoffs. I conclude by discussing policy implications that follow from these limitations.

Read the whole thing.