Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, November 11, 2010

The Economics of Antitrust and Intellectual Property Rights

Posted by D. Daniel Sokol

Mariateresa Maggiolino, Bocconi University - Department of Law takes on the weighty topic of The Economics of Antitrust and Intellectual Property Rights.

ABSTRACT: Economics studies the market conduct of agents, such as individuals, firms, and institutions; it describes the consequences of these behaviors and, if its explanations are successful, it may even provide forecasts and policy suggestions. Therefore legal scholars, who wish to offer well-founded and reliable policy suggestions as to the proper way of shaping, interpreting and enforcing statutes, may find it useful to employ economics to ‘bridge’ legal rules with the empirical phenomena these rules address.

Competition and innovation are, as a matter of fact, the two empirical phenomena that antitrust, patent and copyright provisions address. Therefore, legal scholars, who want to elaborate well-founded and reliable policy suggestions about antitrust and IP statutes, may profitably employ economics to understand how competition and innovation develop.

Like any other social science, economics encompasses both a 'hard core' of well-established principles and concepts, and a ‘fringe’ of new models and insights, which introduce new research questions and explore some of the issues that hard core theories cannot solve.

Usually, scholars that use economics as a bridge between legal provisions and empirical phenomena rely on these hard core theories, because they already belong to common knowledge and, hence, are more administrable for lawyers, judges, and jurors. In fact, textbook economics of IP is quite basic: although the Chicago school has described it only recently, it is rooted in the instrumental/utilitarian approach and in the cost-benefit analysis of neo-classic economics, as well as in the transaction costs insights that derive from the Coase theorem. Likewise, the current textbook economics of antitrust law consists of various industrial organization models, which originate from the application of the above mentioned principles of neo-classic economics to imperfect market realities.

Yet, competition and innovation are kaleidoscopic phenomena that, sometimes, extend beyond the reach of these hard core economic theories. For instance, the industrial organization models that nowadays shape antitrust law are so focused on short-run price and output effects that they cannot fully explain how innovation causes economic growth by changing the long-run performance of firms and markets. And this is an issue (!), especially when antitrust enforcers confront business conduct that involves IPRs - whether agreements, monopolists’ conduct, or mergers - because this conduct produces both short run and long run effects on both competition and innovation. Likewise, despite what orthodox economics suggests, some empirical studies show that in specific industries there is no linear relationship between the scope of IPRs and innovation. And this is an issue too (!), because if broader and stronger IPRs do not boost innovation, the recent propertization phenomenon may turn out to be counterproductive.

As a consequence, some scholars have recently began to look at ‘fringe’ economic theories in order to provide a better ‘bridge’ between antitrust and IP rules, on the one hand, and competition and innovation, on the other hand.

While not attempting to provide an exhaustive discussion of past and current economic theories, the chapter explores the mainstream economic backbone of present antitrust and IP laws (Part A and B) and what future developments these legal rules could undergo because of the influence of some fringe economic theories (Parts C and D). Part A explains that the present antitrust discourse mirrors the ‘normative meaning’ of the perfect competition model, but employs industrial organization models - sometimes, far too sophisticated and complex models - in order to explain firms’ actual behaviors. Part B discusses how neo-classic economics justifies the existence of patents and copyrights by using both the appropriability theory and the Coase theorem. Then, given that industrial organization models cannot fully explain dynamic efficiency and long run phenomena, Part C looks at some heterodox economic theories that place innovation and change at the heart of the competitive process. Similarly, given that arguably the neo-classic justification for IPRs does not always support a proper set of incentives for follow-on inventions and derivative creations, Part D describes how one of those heterodox economic theories, that is to say, evolutionary economics, seems to be capable of striking a better equilibrium between present and future innovation, by elaborating on the ideas of knowledge and learning processes. The chapter concludes with the finding that no drastic change is required in order to apply these fringe economic theories to an understanding of present antitrust and IP rules.

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