Dynamic Competition in Antitrust Law
| DOI | 10.1093/joclec/nhp024 |
| Date | 20 November 2009 |
| Pages | 581-631 |
| Year | 2009 |
| Published By | Oxford University Press |
DYNAMIC COMPETITION IN ANTITRUST LAW
J. Gregory Sidak& David J. Teece
ABSTRACT
How would competition policy be shaped if it were to explicitly favor
Schumpeterian (dynamic) competition over neoclassical (static) competition?
Schumpeterian competition is the kind of competition that is engendered by
product and process innovation. Such competition does not merely bring price
competition. It tends to overturn the existing order. A “neo-Schumpeterian”
framework for antitrust analysis that favors dynamic competition over static
competition would put less weight on market share and concentration in the
assessment of market power and more weight on assessing potential compe-
tition and enterprise-level capabilities. By embedding recent developments in
evolutionary economics, the behavioral theory of the firm, and strategic man-
agement into antitrust analysis, one can develop a more robust framework for
antitrust economics. Such a framework is likely to ease remaining tensions
between antitrust and intellectual property. It is also likely to reduce confi-
dence in the standard tools of antitrust economics when the business environ-
ment manifests rapid technological change. It appears that the Antitrust
Division of the U.S. Department of Justice (DOJ) has attempted to incorporate
more dynamic analysis, but the result has been inconsistent across different
mergers and different doctrinal areas of antitrust law. Moreover, a complicating
factor in the transformation of the law is the fact that the federal courts have,
by embracing the reasoning in the Merger Guidelines promulgated several
decades ago by the Antitrust Division and the Federal Trade Commission
(FTC), caused antitrust case law to ossify around a decidedly static view of
antitrust. Put differently, in the years since 1980, the Division and the FTC
have successfully persuaded the courts to adopt a more explicit economic
approach to merger analysis, yet one that has a static view of competition. The
result is not a mere policy preference. It is law. To change that law to have a
more dynamic view of competition will therefore require a sustained intellec-
tual effort by the enforcement agencies (as well as by scholars and
Chairman, Criterion Economics, L.L.C.; Ronald Coase Professor of Law and Economics,
Tilburg University, The Netherlands; President, The Coase Foundation for Law &
Economics, Washington,D.C. E-mail: jgsidak@criterioneconomics.com.
Thomas W. Tusher Professor in Global Business and Director, Center for Global Strategy
and Governance, Haas School of Business, University of California, Berkeley, CA, USA.
E-mail: teece@haas.berkeley.edu. For their helpful comments on drafts of this article, we
thank Michael Akemann, Douglas H. Ginsburg, William E. Kovacic, Chris Pleatsikas, and
conference participants at George Mason University School of Law, National University of
Singapore, and Tilburg University. Copyright 2009 by J. Gregory Sidak and David J. Teece.
All rights reserved.
Journal of Competition Law & Economics, 5(4), 581–631
doi:10.1093/joclec/nhp024
Advance Access publication 20 November 2009
#The Author 2009. Published by Oxford University Press.
This is an Open Access article distributed under the terms of the Creative Commons Attribution
Non-Commercial License (http://creativecommons.org/licenses/by-nc/2.5/uk/) which permits unrestricted
non-commercialuse, distribution, andreproduction in any medium,provided the original workis properly cited.
practitioners) that, once more, engages the courts to re-examine antitrust law,
as they did in the late 1970s during the ascendancy of the Chicago School,
when antitrust law became infused with its current, static understanding of
competition. A necessary but not sufficient condition for that effort is a public
process by which the Division and the FTC revisit and restate the Merger
Guidelines in a manner that clarifies and defends the role of dynamic compe-
tition in antitrust analysis. We therefore applaud the announcement of the anti-
trust agencies in September 2009 to solicit public comment on the possibility
of updating the Merger Guidelines. Assuming that the Division and the FTC
decide to revise the existing Merger Guidelines, those revised guidelines (and
useful complementary undertakings, such as generalized guidelines on market
power and remedies) then will require leadership by the enforcement agencies
to persuade the courts that antitrust doctrine should evolve accordingly. That
neo-Schumpeterian process may take a decade or longer to accomplish, but it
is a path that we believe the Roberts Court is willing to travel.
JEL: JELK20; K21; L40; L41; L50; O34
I. INTRODUCTION
In 1988, in anticipation of the centennial of the Sherman Act, David
J. Teece and his Berkeley colleagues held a conference that led to the 1992
volume Antitrust, Innovation, and Competitiveness, with contributions from
many of the day’s leading scholars in antitrust law and economics.
1
The
conference was designed to alert the law and economics community to a set
of emerging issues on antitrust and innovation. In hindsight, we believe that
the conference was a watershed event. A slow and reluctant awakening to
antitrust and innovation issues is now well underway.
In the introduction to the proceedings of the conference, Thomas Jorde
and David Teece, as editors, endeavored to reframe antitrust questions.
The issue, they asserted, was that scholars and practitioners needed to take
a more dynamic approach to competition in the spirit of Joseph
Schumpeter:
As Schumpeter (1942) suggested ..., the kind of competition embedded in standard
microeconomic analysis may not be the kind of competition that really matters if enhan-
cing economic welfare is the goal of antitrust. Rather, it is dynamic competition pro-
pelled by the introduction of new products and new processes that really counts. If the
antitrust laws were more concerned with promoting dynamic rather than static compe-
tition, which we believe they should, we expect that they would look somewhat different
from the laws we have today.
2
Jorde and Teece posed the provocative hypothesis that “antitrust laws may
be at odds with technological progress and economic welfare.”
3
In three
1
ANTITRUST,INNOVATION,AND COMPETITIVENESS (Thomas M. Jorde & David J. Teece eds.,
Oxford University Press 1992).
2
Id. at 5.
3
Id. at 3.
582 Journal of Competition Law & Economics
subsequent articles, Teece and his co-authors made efforts to advance the
Schumpeterian agenda.
4
The Horizontal Merger Guidelines
5
are the intellectual cornerstone of
modern antitrust law, yet they contain little discussion of innovation or
dynamic competition. Since the mid-1990s, however, the intellectual winds
have slowly begun to change. A milestone in that progression was the publi-
cation of an article by Michael L. Katz and Howard A. Shelanski in 2005
entitled, “‘Schumpeterian’ Competition and Antitrust Policy in High-Tech
Markets.”
6
Antitrust scholars now actively debate the merits of replacing static
competition with dynamic competition in antitrust analysis.
7
Moreover, the
FTC and DOJ staff and FTC commissioners also now profess that innovation
is important to competition. The agencies promulgated the Intellectual
Property Guidelines in 1995 to allow firms more confidence in exercising their
intellectual property rights,
8
and the Joint Venture Guidelines
9
in 2000 to
outline acceptable forms of cooperation among competitors.
4
See Raymond S. Hartman, David J. Teece, Will Mitchell & Thomas M. Jorde, Assessing
Market Power in Regimes of Rapid Technological Change,2I
NDUS.&CORP.CHANGE 317
(1993); David J. Teece & Mary Coleman, The Meaning of Monopoly: Antitrust Analysis in
High-Technology Industries,43A
NTITRUST BULL. 801 (1998); Christopher Pleatsikas & David
J. Teece, The Analysis of Market Definition and Market Power in the Context of Rapid Innovation,
19 INT’LJ. INDUS.ORG. 665 (2001).
5
U.S. DEP’TOFJUSTICE &FED.TRADE COMM’N,HORIZONTAL MERGER GUIDELINES (revised
Apr. 8, 1997), available at http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmgl.html.
6
See Michael L. Katz & Howard A. Shelanski, “Schumpeterian” Competition and Antitrust Policy
in High-Tech Markets,14C
OMPETITION 47 (2005), available at http://www.law.berkeley.edu/
institutes/bclt/pubs/shelanski/katz_Shelanski_Schumpeter__30Nov2006_final.pdf [hereinafter
“Schumpeterian” Competition].
7
See, e.g., David S. Evans & Keith N. Hylton, The Lawful Acquisition and Exercise of Monopoly
Powerand Its Implications for the Objectives of Antitrust,4C
OMPETITION POL’YINT’L203 (2008);
Jonathan Baker, “Dynamic Competition” Does Not Excuse Monopolization,4C
OMPETITION POL’Y
INT’L243 (2008); Christian Ewald, Competition and Innovation: Dangerous “Myopia” of
Economists in Antitrust? 4C
OMPETITION POL’YINT’L253 (2008); Richard Gilbert, Injecting
Innovationinto The Rule of Reason: AComment on Evans and Hylton,4C
OMPETITION POL’YINT’L
263 (2008); Herbert Hovenkamp, Schumpeterian Competition and Antitrust,4COMPETITION
POL’YINT’L273 (2008); Thomas K. McCraw, Joseph Schumpeter on Competition,4
COMPETITION POL’YINT’L309 (2008); Ilya Segal & Michael D. Whinston, Antitrust in
Innovative Industries,97A
M.ECON.REV. 1703 (2007). For an earlier Schumpeterian perspective
on the Microsoftantitrust case, see Howard A. Shelanski & J. Gregory Sidak,Antitrust Divestiture
in NetworkIndustries,68U.C
HI.L.REV. 1 (2001); J. Gregory Sidak,An Antitrust Rule for Software
Integration,18Y
ALE J. ON REG. 1 (2001). Fora discussion of the role of dynamic competitionin
the antitrust analysis of patent royalties and standard-setting, see Richard Schmalensee,
Standard-Setting, InnovationSpecialists, and CompetitionPolicy,57J.I
NDUS.ECON. 526 (2009).
8
See U.S. DEP’TOFJUSTICE &FED.TRADE COMM’N,ANTITRUST GUIDELINES FOR THE
LICENSING OF INTELLECTUAL PROPERTY § 1 (1995), available at http://www.usdoj.gov/atr/
public/guidelines/0558.pdf [hereinafter ANTITRUST-IP GUIDELINES].
9
See U.S. DEP’TOFJUSTICE &FED.TRADE COMM’N,ANTITRUST GUIDELINES FOR
COLLABORATION AMONG COMPETITORS (Apr. 2000), available at http://www.ftc.gov/os/2000/
04/ftcdojguidelines.pdf.
Dynamic Competition in Antitrust Law 583
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