Should Innovation Rationalize Supra-Competitive Prices? A Skeptical Speculation

Abstract

A recent criticism of competition policy is that antitrust authorities shouldn't focus their concern on prices, since the welfare losses of prices are trivial compared to longer run innovation effects. At minimum, there's a problematic trade-off between so-called static price and dynamic efficiencies. On this view, if there is a credible argument supporting the idea that collusion or merger increases incentives to innovate, one should not worry about price. We entertain here the hypothesis that antitrust should not worry about innovation, just as it should not worry about effects on other markets. Antitrust takes place in the shadow of patent laws, which presumably have evolved to provide efficient innovation incentives when markets are competitive, as most are.

To weaken antitrust enforcement presumes that patent law is not set correctly. A better remedy would be to adjust patent law and other tools for encouraging innovation, e.g., tax credits or prizes. To distort the application of antitrust law to fix shortcomings in patent law provides a correction only if there is a potential antitrust violation (e.g., an otherwise anticompetitive merger) to ignore. Sectors with no antitrust "events" would remain uncorrected.

Keywords: antitrust, innovation, competition

JEL Classification: L40, O38, K21