December 5, 2014—Antitrust specialist Jonathan B. Baker cautioned against accepting arguments that protecting monopolistic behavior can be good for innovation, and he described a fresh approach to testing those arguments.
Baker, a former U.S. regulator and now professor at American University’s Washington College of Law, said the dominant firm in an industry may well increase research and development (R&D) spending even if it is forced to stop conduct that thwarts rivals. He told economists and other analysts at Nathan Associates that demonstrating the likelihood of an increase could help counter the “appropriability” defense. That defense claims that excluding competition directly protects a dominant firm’s investment in the R&D that leads to innovation.
While economic literature has challenged the appropriability defense on several grounds, “I’m adding an argument,” Baker said. “You also have to think about how the dominant firm will react,” when the rival firm, free to compete, steps up spending. If a dominant firm increases R&D spending as rivals increase their R&D spending, “then greater product market competition, the product of antitrust enforcement, would enhance innovation incentives by spurring R&D competition.”
The likely response by a dominant firm to a rival’s increased R&D spending can be evaluated. Baker, an economist as well as an attorney, has written a related paper exploring the evaluation process. Factors include impact on market share. Baker acknowledges that it is still possible for dominant companies, defending themselves in an antitrust case, to show that their R&D spending would decline if that of their rivals would increase.
The economic argument for protecting innovations occurs more frequently in patent law, but a “similar argument sometimes arises in the context of antitrust law,” he said. The appropriability defense underlay several cases, including the 1998 complaint brought by the U.S. government against Microsoft Inc. over its operating system. The case was settled in 2001.
“Greater acceptance of such a defense could potentially justify a substantial relaxation of antitrust enforcement,” he said. “Caution in doing so is important, however, because the social costs of erroneously insulating exclusionary conduct involving innovation from antitrust enforcement may be substantial.”
Baker noted the broader discussion over the importance of competition in a high-tech economy. Peter Thiel, the co-founder of PayPal, argues in a recent opinion piece that “monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate,’’ adding that “monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can’t dream of.”
A resolution by the European Parliament, meantime, asks the European Commission to consider breaking up Google Inc.
Baker spoke as part of Nathan’s “Economists Present” series of monthly presentations. The presentations give a broader perspective on areas where Nathan Associates Inc. is active, including international development and litigation support.