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Innovation Markets Analysis: When Should This Tool Come Out of the Shed?

Innovation Markets Analysis: When Should This Tool Come Out of the Shed?. Presented at the Panel on Non-Price Competition/Innovation Workshop on Merger Enforcement Federal Trade Commission February 18, 2004 Steven C. Sunshine Jonathan M. Lave. Overview.

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Innovation Markets Analysis: When Should This Tool Come Out of the Shed?

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  1. Innovation Markets Analysis:When Should This Tool Come Out of the Shed? Presented at the Panel on Non-Price Competition/Innovation Workshop on Merger Enforcement Federal Trade Commission February 18, 2004 Steven C. Sunshine Jonathan M. Lave

  2. Overview • Innovation is an important dimension of rivalry and engine of progress. • Predictions of a merger’s effect on innovation output are uncertain. • Legal and economic issues require showing of probable effect on output. • Genzyme: example of insufficient evidence of effect? • Practical application may be infrequent and more likely in certain industries.

  3. Innovation markets are not easy to define with confidence • Sources of innovation are difficult to identify • Strength and significance of population of innovators are unclear • Type of innovation may be relevant to confidence in market boundaries

  4. Predicting competitive effects requires an assessment of merger’s effect on innovation and output • Structure as a means of predicting performance • Who is right, Schumpeter or Arrow? • The problem and necessity of case-specific evidence • Innovation efforts and incentives • Incremental v. revolutionary • Nature of competition between innovations • Confidence that the reduction in innovation will lead to an output effect • Is the effect outweighed by innovation efficiencies?

  5. Enough about economics. What about the law? • Does Section 7’s focus on “line of commerce” of commerce doom innovation analysis? • Can a plaintiff prove a nonspeculative effect in a reasonable amount of time? • Burdens and do they really matter? • Burden of proof always on plaintiff • PNB/Baker Hughes, burdens of production, and the prima facie case

  6. Problems of the investigator • Investigator has a duty to evaluate proposed transactions. If innovation is a key dimension of competition, then the investigator must deal with it. • The law – with the state of economic theory – requires the investigator to prove all aspects of the case, including: • the innovation space in which the diminution will occur • the merger’s likely effect on innovation • the manner in which output will be reduced • when the output effect will be felt • The importance of empirical evidence from the merging parties and the market cannot be overstated.

  7. Suggested mode of analysis • Is innovation an important dimension of rivalry? • Will innovation affect existing product market in a reasonable amount of time? • competitive effects in a goods market • potential competition • Can the boundaries of the innovation market be determined?

  8. Suggested mode of analysis (cont.) • Does the merger lessen incentives to innovate? • nature of competition between merging parties • nature of other downstream competition • efficiency analysis • Can harm to an output market be demonstrated? • future goods markets • future improvements to existing goods

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