Antitrust & Innovation
1 September 2004
By Dr. Richard Rapp
In this article published in the Milken Institute Review, NERA Special Consultant Dr. Richard Rapp challenges the notion that a conventional application of the basic principles of antitrust -- the so-called "innovation-market approach" -- should be relied on to assess mergers that raise competitive concerns regarding the level and pace of research and development (R&D).
Dr. Rapp considers the traditional antitrust policy notions of preserving market competition in relation to a current climate in which innovation seems to be the key to prosperity. He traces antitrust enforcers' interest in whether a merger's impact on innovation might be an expression of market power back to 1984, and highlights the critical cases over the past twenty years that have helped shape current thinking on the matter. Paying particular attention to the evaluation of proposed mergers in the pharmceutical industry, he explains that although the innovation-market approach has largely been used as a supplement to conventional merger analysis, the recent Genzyme-Novazyme case is the most striking of many notable exceptions, and demonstrates the paradoxes encountered in weighing consequences for innovation.
Dr. Rapp concludes that while the innovation-market approach seems logical at first glance, a closer examination reveals that the idea is badly flawed in both theory and practice. Since the nature, timing and quantity of innovations cannot be predicted, he notes that antitrust authorities are left to scrutinize the inputs to innovative effort - a stark contrast to merger analyses of conventional-goods markets, where output is examined directly. Given that competition in R&D cannot be rationally assessed by the same criteria as price competition, he questions the merits of regulation whose consequences cannot truly be evaluated.
