Without saying how, FTC Commissioner Slaughter says competition authorities should do more than just protect competition in pipeline products; they should protect broader competition to innovate. At an FTC/DOJ workshop the European Commission implicitly agreed, saying it can protect competition in an Innovation Space. In truth, the European Commission, like any competition authority, can do no more than protect competition in a Future Market. Yet because an authority can, if it chooses, apply the Future Markets Model aggressively, Commissioner Slaughter is in a sense correct: a competition authority can do more than just regulate competition in—narrowly defined—pipeline products.

When Rebecca Kelly Slaughter was the acting chair of the Federal Trade Commission in 2021, she organized a study in which the competition authorities of many industrialized nations examined how they could, together, better protect competition while reviewing mergers among pharmaceutical firms. Certainly a worthy initiative. 

When organizing the study, Acting Chair Slaughter said the authorities must be able to do more than just protect competition in pipeline products. They must be able to somehow protect innovation more broadly, she said. But she did not explain how the authorities would protect such broad competition to innovate. 

As I show in The Future Markets Model: how antitrust authorities really regulate innovation, there is a long history of commentators saying the authorities should somehow protect this broad competition to innovate, but then failing to explain how they would do so. For example, the oft-cited final report from the Stigler Committee on Digital Platforms’ Subcommittee on Market Structure and Antitrust says: 

It is possible to measure pipeline projects and current R&D to obtain a sense of competitive overlap or trajectory, but the tools do not yet exist to accurately forecast the speed and direction of innovation in the longer run. (Emphasis mine.)

Those tools did not yet exist in 2019 when the Stigler Center issued its report. And no one has developed them since. Developing them, as I said in The Future Markets Model, is The (so far) Impossible Dream.

The European Commission, perhaps because Spain is a member state, implicitly claims it has developed these tools. It described these tools at the June 2022 workshop which concluded the international pharmaceutical study. The FTC, along with the Department of Justice, recently issued a report summarizing this workshop. This summary describes what the European Commission claims is the methodology which allows it to protect this broad competition to innovate. 

The Commission says in this summary that it applied this methodology in Dow/DuPont. In Dow/DuPont it actually applied a more elaborate version of the methodology. And when applying this methodology in that case, and others, it claims it finds an “Innovation Space.” Further, in Dow/DuPont the Commission most emphatically claimed that an Innovation Space is not an Innovation Market. The Commission probably did this because many have criticized the concept of an Innovation Market; a market, the American enforcers at least at one time claimed they could find, in which innovation is itself the product. In From Innovation Markets to Innovation Spaces: A new phrase is not innovation, I show that when the European Commission claims it is protecting competition in an Innovation Space, or the American enforcers claim they are protecting competition in an Innovation Market, these authorities are really protecting competition in a Future Market. 

In this ProMarket article I show that the methodology the European Commission described at the workshop, its Innovation Space methodology, is, in reality, just a simplified version of the Future Markets Model. As this implies, the Commission, even if it claims otherwise, actually applies the Future Markets Model. I describe the Future Markets Model in a previous ProMarket article.

The Commission’s Innovation Space methodology, which it calls a framework, has four-steps. As the workshop summary says, “First, the framework examines the effects on actual products and price competition for existing products.” This first step is thus standard antitrust analysis and is, regarding future products and innovation, irrelevant.

The summary’s description of the second and third steps describe the heart of the Commission’s methodology:

Second, it looks at potential products (e.g., advanced-stage pipeline products) and overlaps with either existing marketed products or other potential products. Here, the theory of harm is the loss of potential competition with existing products or between forthcoming products. Third, the framework examines the parties’ ongoing pipelines (e.g., early-stage pipeline products), and whether the merger could change the incentives of the combined firm to invest in parallel product pipelines.

The Future Markets Model, which I reproduce below, divides these two steps into four more clearly defined steps. Most importantly, the Future Market does not assume any authority can clearly distinguish between advanced-stage and early-stage pipeline products. It does not because no authority can make this distinction; the product development process is a continuum which does not break into the neat categories of advanced-stage and early-stage.  

The Commission’s methodology also assumes it, or any competition authority, can easily distinguish between competing products and non-competing products. Again, the Future Markets Model does not make this assumption. And, again, the Model does not make this assumption because this assumption is not valid. Authorities and courts find it hard enough to determine if existing products which are similar, but not identical, compete against each other. If the products do not exist, and the authorities and courts do not know what the products’ features will be, then they most certainly cannot easily determine which products will compete against each other in the future. 

The Future Markets Model thus explicitly recognizes that when analyzing a Future Market an authority must exercise discretion. As I show in, among other places, Illumina/Grail: Using the Future Markets Model to Ask the Right Question, the Future Markets Model breaks the process down into four clearly defined steps. And it recognizes that as an authority answers the questions each step poses that authority must implement whatever it has chosen to be its policy, and must answer the questions aggressively, or not aggressively. The Model asks: 

A. Does a current product exist?

B. How many firms are trying to develop a future product?

C. For each possible future product, is it sufficiently developed that the authority will consider it a possible future product?

D. How broad will the authority define the Future Market? Will the authority consider future products which are similar, but not identical, as future competing products?

Further, the distinction the Commission makes between the theories of harm of its second and third steps makes no sense. The loss of potential competition and the lost incentive to invest in pipeline products is the same thing: if two firms would have competed if they had not merged but, because they merged no longer compete, then the merger’s harm to the Future Market is the same and obvious: the merger created a monopoly. Whether the monopolist sells one or two similar products does not matter; it is still a monopolist. 

And the fourth step of the Commission’s methodology also makes no sense. As the summary says:

Fourth, the framework considers innovation competition at a broader level, including the firms’ capabilities to innovate in certain therapeutic spaces. In particular, it considers whether the transaction might lead to the elimination of an important innovator, or whether a structural reduction of the overall level of innovation in therapeutical spaces might lead to a significant loss of innovation competition.

First, a “therapeutic space” is just a convoluted way of saying a Future Market. Second, the Commission vastly overstates its ability to analyze a firm’s capabilities, or to use this analysis. As I discuss in greater detail in From Innovation Markets to Innovation Spaces in Europe: a new phrase is not innovation, if the Commission believes the transaction will harm competition in a Future Market, then the Commission should and will block the transaction. Professional investors, let alone competition authorities, have great difficulty evaluating firms’ capabilities. If a firm has sufficiently developed a product that it raises antitrust concerns, then the Commission will conclude that the firm is capable. Saying the same thing the other way around, the Commission would not allow an otherwise anticompetitive transaction to proceed because it concludes that one of the relevant firms is incapable. Further, if a firm is capable but is not trying to make a future product, then its capabilities are, for antitrust purposes, irrelevant. I explain this when discussing Meta/Within. In that case Meta was capable of entering the Future Market, but was not trying to. 

Third, regarding the last sentence of the Commission’s fourth step, that sentence, in its entirety, is just a convoluted way of saying the Commission will block a transaction which makes the Future Market uncompetitive.

In sum, the Future Markets Model more accurately describes how competition authorities actually assess markets for products which do not exist yet. It is the tool practitioners and the authorities should explicitly use because: 

  • It is easy to understand.
  • Its four analytical steps describe what the authorities actually do.
  • It does not claim authorities can evaluate firms’ capabilities.
  • It does not claim authorities can distinguish between early and late-stage products.
  • It explicitly recognizes that as it applies the Model an authority must implement its chosen policy.

To conclude, if the European Commission intended to confirm FTC Commissioner Slaughter’s belief that a competition authority can protect firms’ broad competition to innovate then, in one sense, it failed. As both Commissioner Slaughter and the European Commission must accept, a competition authority can do no more than protect competition in a Future Market. Only if firms are trying to make products which may compete against each other in the future may a competition authority reasonably block a transaction. And to see if they should do so, logic requires that they, as they already do, apply the Future Markets Model.

But this analysis shows that Commissioner Slaughter is, in another sense, correct; a competition authority can do more than just protect competition in pipeline products—if one defines “pipeline products” narrowly. A competition authority must exercise discretion when applying the Future Markets Model. It must, among other things, decide whether similar but not identical pipeline products may compete against each other in the future. It must decide how many competitors a Future Market must have to be competitive. In short, it must decide how aggressively it will apply the Model. 

Commissioner Slaughter organized the pharmaceutical study. She took this commendable step, it seems, because she feels instinctively, and strongly, that a competition authority should be able to do more than “merely” protect competition in pipeline products. And she is correct. It can do so, to a reasonable extent. And the Future Markets Model, by making the issues clear, helps the competition authority see what is reasonable. 

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.