Antitrust for the Innovators?

Antitrust for the Innovators?

David J. Teece

Over the last 30 years, a small group of economists, myself among them, has been calling for a pivot in antitrust enforcement to favor innovation and dynamic competition. We may be on the verge of just such a pivot, led by Makan Delrahim.  

Delrahim, the assistant attorney general who heads the Antitrust Division at the US Department of Justice, has on several occasions expressed refreshing views about the role of intellectual property (IP) protection in antitrust law. In doing so, he has implicitly endorsed the view that innovation is what drives competition, and therefore that the best firm and industrial structures are those that support innovation.

Established by the writings of Austrian economist Joseph Schumpeter, this view holds that the introduction of new products and processes is ultimately what drives down prices and creates a dynamic, competitive marketplace. Schumpeter was clear that in the long term, innovation is the most effective way to bring prices down.

But in recent history, US antitrust enforcement has instead focused on the short term. Delrahim’s predecessors mostly fixated on market share and pricing behavior. This led to decisions that protect consumers in the here and now, but sometimes fail to help innovators achieve the returns they need to attract investment in the research and development that leads to disruptive innovation. 

We live in an age in which the benefits of disruption—Schumpeter called it “creative destruction”—are apparent in almost every activity we undertake, from hiring a car to shopping for airfare to applying for a mortgage. Intellectual property provides the legal underpinning for these advances.

Yet it is hard to find circumstances where antitrust regulators—the Justice Department and Federal Trade Commission—have taken up the cudgel to protect IP owners. In fact, regulators have shown more concern over the prospect that patent royalties might drive up prices today than in protecting the patent holders in the interest of future innovations that will produce exponentially lower prices. 

Delrahim may be about to change that. Starting in November 2017, in speeches at the University of Southern California, the US Embassy in Beijing and the College of Europe in Brussels, Delrahim has articulated principles that signal a shift toward enforcement aimed at protecting and promoting innovation. 

“Experience and economic research have taught us that intellectual property rights are the key to unlocking the innovation that drives our economy,” he said in Beijing. 

In that speech and at USC, Delrahim expressed skepticism that patent holders can charge exorbitant royalty fees once their technology is adopted by an industry standards-setting body. The so-called holdup problem, widely accepted by antitrust regulators but almost completely unsupported by data or research, has been a core principle of enforcement. Instead, Delrahim asserted, regulators should be more concerned with the opposite phenomenon: patent holdouts, where implementers of technology simply start using it without paying royalties, challenging the patent holder to either litigate or agree to their royalty terms. 

“Competition and consumers both benefit when inventors have full incentives to exploit their patent rights,” Delrahim said. “This requires an assurance to inventors that they need not subsidize their competitors’ business models if they prefer not to do so.” 

I couldn’t agree more. And for the first time in years, I feel optimistic that US antitrust enforcement may be turning in the direction of dynamic competition—and a more innovative economy.   

Editor’s note: A longer version of this article will appear in the journal Antitrust Magazine.

David J. Teece is the chairman and principal executive officer of Berkeley Research Group.

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