Incorporating New Understandings of Innovation into Antitrust Law

Since the 1970s, regulators and policymakers have been predominantly guided by a hands-off, market-first approach to competition policy. A guiding assumption of this philosophy holds that firms—motivated by financial incentives and a healthy competitive market—innovate best without the heavy hand of government.

Recent years, however, have seen a sea change in antitrust law. A new crop of policymakers and scholars have challenged antitrust’s laissez-faire approach, arguing that it overlooks modern economic research and the larger economic, political, and social harms of concentrated power—precisely the ills against which US antitrust law was designed to protect.

While this renewed perspective has proven remarkably effective in challenging traditional doctrine and outdated economic dogma, many assumptions surrounding innovation have been left intact. Antitrust still primarily relies on an outdated economic approach to innovation, which is assumed to be a product of individual (company) effort in response to discrete financial incentives. Accordingly, many US courts have adopted and simplified this incentive-oriented view of innovation to argue that monopoly pricing “induces risk taking that produces innovation and economic growth” (Justice Scalia in Verizon v. Trinko), giving more legal leeway to mergers and the active acquisition of monopoly power.

This framing overlooks how innovation actually takes place. Incentives matter, but they are only a part of the story. In a recent Roosevelt report, Innovating Antitrust Law: How Innovation Really Happens and How Antitrust Law Should Adapt, author Ketan Ahuja argues that innovators, however strong their incentives are, need the ability to innovate. Unlocking innovation requires that people have access to the right mix of key inputs, capabilities, know-how, customers, partners, and funding. Environments with the right combination of these things are what actually produce innovation. Thus, innovation occurs for a whole range of reasons (financial and nonfinancial), and the public sector has a crucial role to play in shaping the rate and direction of innovation.

Incorporating this perspective into antitrust would have significant policy implications for how and when the government acts, and would lead competition policy to better support innovation that benefits innovators, consumers, and workers and that leads to stronger shared economic growth for all. Competition policy should reflect the fact that innovation “ecosystems” are at least as important as specific innovation incentives.