How Innovation Really Happens and How Antitrust Law Should Adapt
October 19, 2022
By Ketan Ahuja
We’ve understood for some time that innovation holds the key to improving human well-being and economic growth—pushing the frontier of what’s possible. But antitrust laws often misunderstand how innovation happens and what it requires, leading to antitrust rules that do not promote innovation effectively, and possibly even undermine it.
To fix this, we need to bring new understandings of innovation into antitrust conversations. As explored in detail in my new report, Innovating Antitrust Law: How Innovation Really Happens and How Antitrust Law Should Adapt, emerging research in economics and other disciplines is starting to shed light on the innovation process, suggesting it often arises from sharing information across firms and combining capabilities across the public and private domains in new ways. We can use these learnings to regear antitrust to promote innovation and steer it toward more productive ends, unleashing innovators to solve our hardest problems and generating faster and more shared growth.
Antitrust discussions on innovation can sometimes have an abstract, intangible quality to them: Innovation happens when big companies invest in it and can then profit from their investments, or perhaps innovation happens when companies are afraid of their competition and try to stay ahead of it. In a well-argued antitrust legal case, reams of detailed economic analysis on innovation would sit behind these observations and rightly put them in context. But abstract heuristics operate like a ghost in the machine of legal interpretation, shaping both the detailed contextual analysis and the high-level observations and conclusions lawyers and judges draw that typically determine a case’s outcome.
In large part, this is because the people in antitrust circles have focused their attention on only a part of the innovation question: They concentrate on what best incentivizes people to innovate. In doing so, the antitrust community has internalized a shared point of view that innovation happens when actors apply effort to a problem.
This collective myopia has real consequences: It means that antitrust does not promote innovation that well, and may even undermine it.
Focusing on incentives to innovate has led antitrust enforcers to fixate on interactions between direct competitors: In traditional theory, these “horizontal” interactions determine incentives such as how much competitive pressure a company is under to innovate, and how much a company can earn a return from its innovations within a market. In practice, this has meant a weak antitrust doctrine and a permissive approach to corporate consolidation, particularly for “vertical” or “conglomerate” mergers which involve companies merging with those outside their direct market.
As a result, antitrust enforcers have allowed big tech platforms to acquire more than 400 startups (normally as vertical or conglomerate mergers), only recently starting to object to these waves of merger activity.
Incentives matter, but they’re only a part of the innovation story. Innovators need to be able to innovate, however strong their incentives are. Innovation is a team sport: Innovators need access to key inputs, capabilities, know-how, customers, partners, and funding. In other words, environments with the right combination of these things produce innovators, while environments structured in less conducive ways tellingly lack innovators. Gordon Moore created Intel, but Silicon Valley created Gordon Moore.
Broadly, innovation “ecosystems” are at least as important as innovation incentives. Emerging research focuses on the relationships between innovators, and suggests that new innovations are almost always combinations of old technologies (or “capabilities,” where a capability is the capacity to do or make something). Innovation policy, according to this research, should aim to bring more capabilities in closer relationship with each other, so that innovators can combine them into new products and services more easily. That requires increasing knowledge-sharing across networks, coordinating innovation communities around certain objectives, and allowing for substantial movement of people and ideas between firms.
At the moment, these ideas are largely absent from antitrust. Rules on vertical and conglomerate mergers do not assess whether these mergers remove an independent technology or economic “capability” from open market access. Antitrust’s debates around “essential facilities” or platforms are generally framed in terms of whether the facility owner can profit from investing in the facility, rather than how easy it is for the entrepreneurs to experiment with connecting technologies together in new ways. Discussion of innovation ecosystems does animate some corners of antitrust (such as those around research and development collaborations between potential competitors), but the general thrust of antitrust focuses on innovation as arising from incentives rather than from ecosystems.
It’s time to incorporate perspectives on innovation as arising from ecosystems more broadly into antitrust: Doing so will bring a more accurate understanding of the innovation process into antitrust, and thereby lead antitrust to promote innovation more effectively. It will prompt antitrust to ask different questions. In particular, it would focus on promoting the emergence of new economic capabilities, and ensuring that existing capabilities remain accessible to many innovators rather than being swallowed up for exclusive use by some existing large company.
This will produce a more assertive antitrust doctrine that aims to modularize key parts of production and ensure capabilities remain tradable as market commodities. In particular this antitrust regime would take dominant companies’ refusals to deal with their competitors more seriously (often referred to as “essential facilities” arguments). It would also be much more likely to block vertical and conglomerate mergers that may remove a unique capability from the market, and limit or ban worker noncompetes that obstruct circulation of know-how between firms.
This matters for workers and entrepreneurs: Workers could more effectively put their skills to use where they want if they are empowered to move jobs. Entrepreneurs could make faster progress when they can easily integrate the building blocks they need to make their ideas a reality. And bringing these principles into antitrust enforcement may help us create the next big innovations driving public value in our economy.