Antitrust misunderstands innovation by focusing almost entirely on incentives to innovate to the neglect of questions regarding the ability to innovate through sharing knowledge and combining capabilities. Bringing these concerns into antitrust cases and competition policymaking would benefit innovators, consumers, and workers and lead to stronger innovation and economic growth, argues Ketan Ahuja in a new paper published by the Roosevelt Institute.

Moderna and Pfizer/BioNTech’s mRNA Covid-19 vaccines represent the very best of human innovation. Within a year of the start of the Covid-19 pandemic, these companies had developed entirely new vaccines that saved almost eight million lives in 2021. They also commercialized an entirely new biotech platform that could someday help cure malaria, AIDS, and cancer.

The creation of these mRNA vaccines tells two stories about encouraging innovation. The first story is familiar: how enormous incentives (which have made senior executives at Moderna, Pfizer, and BioNTech billionaires) can marshal capital and talent to achieve herculean feats (let’s call this story Innovation-as-Incentives). The second story is less discussed but just as critical: how innovation happens when public and private agents share knowledge and combine capabilities, supported throughout by government and non-profit institutions (let’s call this story Innovation-as-Capabilities).

Antitrust misunderstands innovation by focusing almost entirely on Innovation-as-Incentives to the neglect of Innovation-as-Capabilities. Introducing concerns of Innovation-as-Capabilities into antitrust cases and competition policy-making would benefit innovators, consumers, and workers and lead to stronger innovation and more shared and more dynamic economic growth.

Rich troves of economic research support both the Innovation-as-Incentives story and the Innovation-as-Capabilities story. However, the types of economic research behind the two narratives on innovation differ. Neoclassical competition economists have tended to pursue research into innovation from an Innovation-as-Incentives perspective, implicitly understanding innovation to be something that happens within a firm in response to material reward.

By contrast, economic research from Innovation-as-Capabilities perspectives is much more methodologically diverse, coming from fields like sociology, economic history, economic geography, and business strategy. As I found in a new paper with the Roosevelt Institute, this perspective understands innovation as “emerging” from a structure of social and technological relations that are conducive to innovation and focuses more on relationships between firms, talent, customers, investors, research institutions, and partners. A standard paradigm within this line of research is that innovation takes place by combining pre-existing “ingredients” or capabilities in new ways. For example, a gas turbine and a jet engine share many similar engineering challenges: if you know how to make gas turbines and you combine this knowledge with an understanding of airplanes, you can figure out how to make jet engines relatively easily, opening up a new class of economic opportunities.

Under this paradigm, innovations of a certain type are more likely to arise where more of the required capabilities are in close proximity to each other. Proximity here means relational proximity, or the ease with which market participants can combine different capabilities to come up with new products and services. This could include geographic proximity but will also include the strength of social or professional ties between workers and customers, knowledge sharing between firms, and ease of access to opportunities or commercial partners.

Paradigms around innovation (whether incentive or capability oriented) form a worldview about how innovation functions. They shape the questions we ask, the data we pay attention to, and how we integrate different observations or models into broader narratives to explain a problem.

Antitrust largely understands innovation through the paradigm of incentives. Incentive-oriented reasoning, adopted and transformed in legal discourse, shapes the parameters of legitimate debate about innovation in antitrust cases and policy circles. Reasoning around innovation incentives has been instrumental in shaping antitrust rules on essential facilities, duties to deal and merger policy, among other things.

Consider the FTC’s recent complaint against Facebook: in dismissing the FTC’s initial complaint, Judge James E. Boasberg of the US District Court for the District of Columbia concluded that Facebook’s refusal to interoperate with competitors could not violate US antitrust law. Consistent with previous decisions, Boasberg relied on the Innovation-as-Incentives paradigm, stating:

[f]irms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.

To be sure, capabilities-oriented reasoning is not completely absent from antitrust. For instance, it crops up in discussions around synergies in mergers and in exemptions related to research and development collaborations, such as the EU’s Research and Development Block Exemption. But antitrust lacks a sense of how innovation requires bringing capabilities in proximity to each other as a broader motivating force.

This has real, negative implications for how firms compete. Firms in competitive markets seek both to improve their efficiency and build their market power. It can be hard sometimes to distinguish when certain activities are efficiency-improving or power-seeking. Antitrust’s misunderstanding of how innovation happens leads it to approach innovation questions with a default bias towards rendering returns appropriable and protecting investments (as we saw with Boasberg in FTC v. Facebook). Correctly integrating Innovation-as-Capabilities research into antitrust law lets us see that these activities are often power-seeking rather than efficiency-improving, and antitrust’s endorsement of them likely harms innovation.

So what would antitrust doctrine based on the Innovation-as-Capabilities paradigm look like? As a thought experiment, we might consider how a judge would frame their reasoning in FTC v. Facebook in an alternate world where the Innovation-as-Capabilities paradigm is prominent and the Innovation-as-Incentives paradigm less gripping. Considering the facts of FTC v. Facebook, the judge might reason:

The opportunity to innovate within a specific techno-economic domain requires that astute business people have access to that domain’s essential capabilities, and that they can recombine these capabilities freely to create new products and services. Where unique capabilities are controlled by companies or their access is otherwise restricted, making these capabilities available for exchange as market commodities empowers entrepreneurs to experiment which produces innovation and economic growth. To safeguard the ability to innovate, restricting access to a capability will be considered unlawful if that capability is not reasonably available elsewhere and that capability is required as an ingredient in new products and services.

A competition policy that took Innovation-as-Capabilities seriously would incorporate the following principles: First, it would aim to modularize key economic capabilities and make them tradable as commodities on the market. This would lead to a more assertive merger control regime, which would be more likely to prohibit vertical and conglomerate mergers. Second, it would involve a much stronger essential facilities doctrine than is currently the case in US antitrust law, mandating interoperability and access to facilities where required to facilitate new products and services. Lastly, it would refuse to enforce non-competes against workers to ensure that tacit knowledge and capabilities can be shared more freely across the economy.

Moderna’s recent strategy to maximize the value of its patents showcases the dark side of innovation. After accepting billions of dollars in public funding over years-long collaborations with public sector researchers, Moderna has disputed the US National Institute of Health’s claim to joint ownership of key patents in its mRNA platform. It has also filed a patent infringement lawsuit against BioNTech.

An antitrust system built on an incentive-oriented understanding of innovation can ultimately enable companies’ attempts to seek market power rather than improve their products, just as the intellectual property law system can enable rent-seeking if it is too protective of intellectual property rights. It is time to bring voices on innovation as a process of sharing knowledge and combining different capabilities into the antitrust conversation on innovation. Failure to do so could prevent the emergence of the next Covid vaccine.  

Disclosure: The author received a small payment for writing this article from the Roosevelt Institute, a non-profit think tank that focuses on “corporate and public power, labor and wages, and the economics of race and gender inequality.”

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