How Antitrust Enforcement Can Spur Innovation: Bell Labs and the 1956 Consent Decree

64 Pages Posted: 23 Jan 2017

See all articles by Martin Watzinger

Martin Watzinger

Ludwig Maximilian University of Munich (LMU)

Thomas A. Fackler

Ludwig Maximilian University of Munich (LMU)

Markus Nagler

Ludwig Maximilian University of Munich (LMU)

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: January 2017

Abstract

We study the 1956 consent decree against the Bell System to investigate whether patents held by a dominant firm are harmful for innovation and if so, whether compulsory licensing can provide an effective remedy. The consent decree settled an antitrust lawsuit that charged Bell with having foreclosed the market for telecommunications equipment. The terms of the decree allowed Bell to remain a vertically integrated monopolist in the telecommunications industry, but as a remedy, Bell had to license all its existing patents royalty-free. Thus, the path-breaking technologies developed by the Bell Laboratories became freely available to all US companies. We show that in the first five years compulsory licensing increased follow-on innovation building on Bell patents by 17%. This effect is driven mainly by young and small companies. Yet, innovation increased only outside the telecommunications equipment industry. The lack of a positive innovation effect in the telecommunications industry suggests that market foreclosure impedes innovation and that compulsory licensing without structural remedies is ineffective in ending it. The increase of follow-on innovation by small and young companies is in line with the hypothesis that patents held by a dominant firm act as a barrier to entry for start-ups. We show that the removal of this barrier increased long-run U.S. innovation, corroborating historical accounts.

Keywords: Antitrust, Compulsory Licensing, innovation, Intellectual Property

JEL Classification: K21, L40, O3, O33, O34

Suggested Citation

Watzinger, Martin and Fackler, Thomas A. and Nagler, Markus and Schnitzer, Monika, How Antitrust Enforcement Can Spur Innovation: Bell Labs and the 1956 Consent Decree (January 2017). CEPR Discussion Paper No. DP11793. Available at SSRN: https://ssrn.com/abstract=2904315

Martin Watzinger

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Thomas A. Fackler (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Markus Nagler

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Monika Schnitzer

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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