Dynamic Competition in Antitrust Law

Daniel Teece and Gregory Sidak —  26 October 2009

The Horizontal Merger Guidelines are the intellectual cornerstone of modern antitrust law, yet they contain little discussion of innovation or dynamic competition. Although the Merger Guidelines do not constitute law merely by virtue of their promulgation by the agencies, the courts previously have accepted the revised principles that the agencies have advocated. By embracing the reasoning in the Merger Guidelines promulgated several decades ago by the Antitrust Division and the Federal Trade Commission, the federal courts have caused antitrust case law to ossify around a decidedly static view of antitrust. Put differently, in the years since 1980 the Division and the FTC have successfully persuaded the courts to adopt a more explicitly economic approach to merger analysis, yet one that has a static view of competition. The result is not a mere policy preference. It is law. To change that law to have a more dynamic view of competition will therefore require a sustained intellectual effort by the enforcement
agencies (as well as by scholars and practitioners) that, once more, engages the courts to reexamine antitrust law as they did in the late 1970s during the ascendancy of the Chicago School, when antitrust law became infused with its current, static understanding of competition. It appears that, before the Obama Administration took office, the Antitrust Division was attempting to incorporate more dynamic analysis, but the result was inconsistent across different mergers and different doctrinal areas of antitrust law.

Put succinctly, competition policy rooted in static economic analysis sees the policy goal as minimizing the Harberger (deadweight loss) triangles from monopoly. A new competition policy, recognizing the special power of dynamic competition, would advance the availability of new products and the co-creation of new markets that allows latent demand (and hence new amounts of consumer surplus associated with new demand curves) to be realized by consumers. It would also recognize cost savings flowing from innovation as an indicator of likely future consumer welfare gains. Put differently, the focus of a revised competition policy and merger-guideline framework would still very much be on the consumer, but it would be future-oriented and would recognize that certain business practices might lead to market creation (or at least co-creation) that would yield new demand curves with large gains in consumer surplus (because demand for new products could be satisfied). The minimization of Harberger deadweight loss triangles would be a secondary focus. Where minimizing Harberger triangles today stands in the way of creating new and significant future demand curves, a new competition policy would likely favor the future and recognize the welfare benefits associated with creating or co-creating new markets.

To develop policy prescriptions that do more good than harm, economists and antitrust scholars and practitioners need to inquire into the determinants of innovation and the impact of antitrust activity (including merger policy) on innovation. Rapid technological change advances dynamic competition. The problem is that the analytical framework that economists most commonly embrace adheres stubbornly to the view that market structure-and little else-determines the rate of technological change. We develop these ideas in much greater detail, with specific proposals to amend the Merger Guidelines, in “Dyanamic Competition in Antitrust Law,” forthcoming in the Journal of Competition Law & Economics.

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