How do American and European Competition Authorities Protect Competition to Innovate?

by | Jan 23, 2023 | Antitrust

European, American, in fact all, competition authorities strive to protect competition to innovate. They want to force firms to make new products and services. This innovation, the authorities correctly believe, drives long-term economic growth.

But competition law has never been able to properly measure innovation. Standard competition law tools analyze price and other aspects of markets for existing products. But when authorities protect competition to innovate they are protecting competition to make new products, products which do not exist.

For example, two firms may be trying to develop the same new product. If the firms successfully develop the products, then the products will compete against each other in the future, when they exist. But the two firms may decide to merge now, before the products exist. Since the firms are not current competitors standard antitrust tools would approve this merger. But the authorities know that if the firms merge they will no longer be competing to make the new product. The firms will no longer be competing to innovate.

When the European or American antitrust authorities analyze cases such as this they claim they are directly analyzing competition to innovate. The American enforcers sometimes call a market in which firms compete to innovate an innovation market, and sometimes they call it an R&D market. And the European Commission claims it can analyze competition in what it calls an innovation space, which it emphatically says is not an innovation market.

The authorities’ labels are confusing because they are not accurately describing what they do. After extensively reviewing innumerable cases over the last 20 years Lawrence B. Landman has identified the analytical process the authorities actually use when they claim to be analyzing competition to innovate. As they go through this analytical process, Dr. Landman shows, they are actually protecting competition in Future Markets, markets for products which do not exist yet. Dr. Landman calls this process, the analytical process the authorities actually use, the Future Markets Model:

  • Does a current product exist?
  • How many firms are trying to develop a future product?
  • For each possible future product, is it sufficiently developed that the authority
    will consider it a possible future product?
  • How broad will the authority define the Future Market?
    Will the authority consider future products which are similar, but not identical, as future competing products?

Any authority can apply the Model more or less aggressively. In one case, for example, in which both the American Federal Trade Commission (FTC) and European Commission reviewed the same merger, the European Commission concluded that an injectable form of an anti-migraine drug, which already existed, competed in the same Future Market as the oral form of the anti-migraine drug, which both firms were trying to develop. And since three products competed in this Future Market the Commission found the Future Market sufficiently competitive. By contrast the FTC, acting more aggressively, found that the oral form of the drug competed in a separate Future Market. And since only two products competed in this Future Market, the FTC concluded, it was not sufficiently competitive.

Most importantly, because an authority can never know if a firm will successfully develop a product, an authority can, in the face of this uncertainty, act more or less aggressively. For example, because neither authority could know with certainty if the transaction would harm competition in the future online advertising market both the FTC and European Commission approved Google’s purchase of Doubleclick. FTC Commission Harbour, however, said that the two companies were developing products which could compete against each other in the future. Therefore, this dissenting FTC Commission said, despite the uncertainty she would have blocked the transaction.

These days all antitrust authorities are increasingly aggressive. They are, in essence, trying to stop firms from exploiting the loophole of time. They will not let firms enter into a transaction which will cause anticompetitive harm, not currently, but in the future. Google did in fact go on to dominate the online advertising market, and the authorities have learned their lesson.