Antitrust laws must promote the true driver of growth: innovation

The goal underpinning U.S. antitrust law is to promote competition that leads to lower prices and enhanced consumer welfare. 

For years, antitrust agencies have approached this goal by focusing on short-term, static competition, which emphasizes achieving low prices in the here and now.

{mosads}This narrow focus, however, has resulted in unnecessary conflict between the static competitive analysis deployed by antitrust regulators and the dynamic issues raised by intellectual property.    

Fortunately, over the last few decades, a growing recognition has emerged among economists that antitrust laws must be recalibrated to preserve the incentive to innovate and promote the U.S. innovation economy. 

These economists are calling for an antitrust framework that prioritizes dynamic over static competition — placing less weight on market concentration in the assessment of market power and more weight on assessing technological opportunity, innovation-driven competition and appropriate enterprise-level capabilities.

At the heart of this movement is the foundational principle, dating back to Joseph Schumpeter and Nobel Laureate economist Robert Solow, that innovation is the main driver of economic growth. 

Indeed, given the strong economic evidence that innovation drives productivity, sharpens competition and creates new products, a serious consumer-oriented antitrust policy, with an intermediate-to-long-term orientation, necessarily must focus primarily on supporting and advancing innovation.   

However, although antitrust agencies routinely claim to favor both innovation and competition, this has not always been the case.

For instance, during the previous administration, some agency heads unnecessarily generated tension between static competitive analysis — with its undue emphasis on achieving low prices in the short term — and the dynamic issues implicated by intellectual property and associated royalty payments. 

Royalties, in the short run, raise prices of licensed goods relative to the prices that would prevail absent payments.

However, payments to licensors also support innovation by helping innovators achieve the economic returns necessary to draw forth the critical investment dollars needed to support research and development (R&D) and continuing innovation. 

This model produces a continuous cycle of innovation in which innovators are properly incentivized to invent and reinvest their royalties into more R&D, which leads to new innovations and restarts the cycle.  

A prime example of the dynamic benefits flowing from such an innovation ecosystem is 5G. This revolutionary technology promises the ability to connect to and control cities, automobiles, objects and devices, transforming a broad range of industries in the process. 

Thanks to its private-sector top performers, the United States currently leads the world in 5G — a distinction that comes with an extraordinary opportunity for massive economic growth and increased consumer welfare. 

However, the rigid application of an antitrust framework focused on short-term pricing, rather than on innovation as a critical driver of competition, could cause the United States to forfeit its 5G leadership position. 

This would not only reduce consumer welfare but would pose a clear risk to U.S. national security — a fact recognized by U.S. national defense agencies in prohibiting a foreign company from acquiring Qualcomm, a U.S. technology company, because the proposed transaction imperiled Qualcomm’s 5G leadership position.     

Recently, the U.S. Department of Justice (DOJ) has indicated that a course correction may be underway. In a series of speeches, Assistant Attorney General Makan Delrahim, head of the DOJ’s Antitrust Division, signaled that the focus of a sound antitrust analysis must be less on short-term pricing and more on the innovation and growth that delivers value to consumers over the longer term. 

For example, in his speech before the U.S. Embassy in Beijing, Delrahim invoked “promoting dynamic competition” as a normative goal of competition regulators.

He also declared that “competition law enforcers around the world must give careful consideration to the interests that drive innovation, including by allowing innovators to reap the full rewards of their investment in research and development.”  It appears that Delrahim correctly recognizes that innovation is the critical driver of competition.

While Delrahim’s leadership on this issue is admirable, officials at the Federal Trade Commission (FTC) regrettably have yet to follow the DOJ’s lead. The FTC continues to endorse outdated modes of competition regulation and policies that are not properly calibrated to promote dynamic competition and advance innovation. 

In order to truly enhance consumer welfare over the long term, I hope the FTC soon will join hands with the DOJ and help move the United States toward a pro-innovation policy founded upon a dynamic competition paradigm.

For over 30 years, a small group of economists has been calling for a pivot in antitrust in favor of dynamic over static competition. With Delrahim at the helm of the DOJ’s Antitrust Division, we may soon witness such a pivot. 

U.S. antitrust policy needs to adopt a deeper understanding of innovation processes and competition over the long run, and there needs to be greater policy coherence among antitrust, industrial and technology policies. 

The dynamic competition paradigm is both the easiest and the best intellectual paradigm for the competition agencies and the courts to employ to free antitrust from its current outmoded framework. Indeed, prioritizing dynamic competition over its weaker sibling will enhance not just consumer welfare, but economic welfare, too.   

David J. Teece is the Thomas W. Tusher professor in global business at the University of California, Berkeley’s Haas School of Business. He is also the director of the Tusher Initiative on Intellectual Capital Management in the school’s Institute for Business Innovation and the founder of Berkeley Research Group, a consulting firm.