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Innovation Markets Analysis: When Should This Tool Come Out of the Shed?. Presented at the Panel on Non-Price Competition/Innovation Workshop on Merger Enforcement Federal Trade Commission February 18, 2004 Steven C. Sunshine Jonathan M. Lave. Overview.

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Innovation markets analysis when should this tool come out of the shed

Innovation Markets Analysis:When Should This Tool Come Out of the Shed?

Presented at the Panel on Non-Price Competition/Innovation

Workshop on Merger Enforcement

Federal Trade Commission

February 18, 2004

Steven C. Sunshine

Jonathan M. Lave


Overview
Overview

  • Innovation is an important dimension of rivalry and engine of progress.

  • Predictions of a merger’s effect on innovation output are uncertain.

  • Legal and economic issues require showing of probable effect on output.

    • Genzyme: example of insufficient evidence of effect?

  • Practical application may be infrequent and more likely in certain industries.


Innovation markets are not easy to define with confidence
Innovation markets are not easy to define with confidence

  • Sources of innovation are difficult to identify

  • Strength and significance of population of innovators are unclear

  • Type of innovation may be relevant to confidence in market boundaries


Predicting competitive effects requires an assessment of merger s effect on innovation and output
Predicting competitive effects requires an assessment of merger’s effect on innovation and output

  • Structure as a means of predicting performance

    • Who is right, Schumpeter or Arrow?

    • The problem and necessity of case-specific evidence

  • Innovation efforts and incentives

    • Incremental v. revolutionary

    • Nature of competition between innovations

  • Confidence that the reduction in innovation will lead to an output effect

  • Is the effect outweighed by innovation efficiencies?


Enough about economics what about the law
Enough about economics. What about the law? merger’s effect on innovation and output

  • Does Section 7’s focus on “line of commerce” of commerce doom innovation analysis?

  • Can a plaintiff prove a nonspeculative effect in a reasonable amount of time?

  • Burdens and do they really matter?

    • Burden of proof always on plaintiff

    • PNB/Baker Hughes, burdens of production, and the prima facie case


Problems of the investigator
Problems of the investigator merger’s effect on innovation and output

  • Investigator has a duty to evaluate proposed transactions. If innovation is a key dimension of competition, then the investigator must deal with it.

  • The law – with the state of economic theory – requires the investigator to prove all aspects of the case, including:

    • the innovation space in which the diminution will occur

    • the merger’s likely effect on innovation

    • the manner in which output will be reduced

    • when the output effect will be felt

  • The importance of empirical evidence from the merging parties and the market cannot be overstated.


Suggested mode of analysis
Suggested mode of analysis merger’s effect on innovation and output

  • Is innovation an important dimension of rivalry?

  • Will innovation affect existing product market in a reasonable amount of time?

    • competitive effects in a goods market

    • potential competition

  • Can the boundaries of the innovation market be determined?


Suggested mode of analysis cont
Suggested mode of analysis (cont.) merger’s effect on innovation and output

  • Does the merger lessen incentives to innovate?

    • nature of competition between merging parties

    • nature of other downstream competition

    • efficiency analysis

  • Can harm to an output market be demonstrated?

    • future goods markets

    • future improvements to existing goods