Richard J. Gilbert and A. Douglas Melamed
Economists have long understood that innovation has a far more significant impact on economic welfare than the deadweight loss from prices that exceed levels in competitive markets or from other static inefficiencies. Antitrust law is concerned with promoting welfare by protecting competition. Therefore, to the extent that antitrust law is focused on economic welfare, it needs to be shaped at least in part in light of the best understanding of how competition affects innovation. For this purpose, innovation means a new or improved product or process that differs significantly from previous products or processes and that is put into active use by the innovator or others.
Partially as a consequence of developments in highly dynamic and research-intensive sectors of the economy, the connection between antitrust law and innovation is of increasing importance to competition policy makers and scholars. The authors of this paper have written about that connection. The purpose of this paper is to describe the evolution of that connection and to provide a preliminary assessment of the extent to which antitrust enforcement reflects the best current understanding of how competition affects innovation.
In part I, we review the understanding of lawmakers and judges about the relationship between competition and innovation in the first decades after the enactment of the Sherman Act in 1890. In part II, we summarize what economics teaches about that relationship. In parts III and IV, we review the more recent treatment of innovation by antitrust enforcement agencies and the courts under the Sherman Act and the Clayton Act. We add some thoughts regarding analytical approaches for conduct or mergers that affect innovation in Part V and conclude in Part VI.