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Innovation and the Domain of Competition Policy

By Hanno Kaiser

In his latest article on the subject, Herbert Hovenkamp expands his argument about the role of antitrust in the context of technology markets. Innovation requires:

1. a public domain of ideas and expressions; and
2. some protection for new ideas.

The former is a necessary condition for innovation, the latter is not. Note that the second requirement, as Hovenkamp frames it, is not “some incentive to produce new ideas.” That would be a necessary condition. But since the IP laws have chosen the way of propertization for creating the necessary incentives, Hovenkamp’s focus is appropriate.

The problem that this raises of course is that the size of the public domain and the scope of IP protection are inversely related. Every grant of an IP right reduces the size of the public domain, and the broader the IP right the greater the reduction. An optimal IP policy tries to find the spot that maximizes the net gains from the incremental social value of increased exclusivity less the loss of social value from the reduced public domain as well as the administrative and litigation costs of running the IP system. By contrast, the giving of IP rights which do nothing to enlarge the ex ante incentive to innovate reduces the size of the public domain without giving anything in return.

In Hovenkamps view, which I share, the IP laws have gone too far in terms of protecting “new” ideas at the expense of the commons.

I believe that antitrust should not be too defensive about asserting a broader role in IP/competition disputes. This is so for two reasons. First, the extent of special interest capture is significantly greater in IP law than in antitrust, although today patent is experiencing some important reforms. Second, antitrust has profited greatly from its period in the wilderness, something that the IP laws have yet to experience.

Specifically, Hovenkamp proposes greater antitrust scrutiny for:

• IP settlements with reverse payments;
• Acquisition of patents by firms with pre-existing market power; and
• Certain tying arrangements that do, in fact, foreclose in the tied product market (under a rule of reason).

Full post as published by Antitrust Review on June 02, 2008 (boomark / email).