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Innovation competition presents challenges for antitrust law and enforcement policy. Innovation has generated changes in the nature of competition as firms introduce new transaction techniques, product designs, and production processes. Innovation competition is driving the 'Business Revolution' in retail, wholesale, manufacturing, services, and financial technology. Transaction innovation in online platforms and multi-sided markets has raised antitrust concerns about anticompetitive conduct, vertical restraints, consumer privacy, and barriers to entrepreneurship. The article argues that although antitrust policy makers recognize the importance of innovation competition, they need to update their economic frameworks. Antitrust policy makers need to move beyond traditional analysis based on the twin frameworks of perfect competition and imperfect competition. The article provides an introduction to the emerging Economics of Technology & Innovation and examines some implications for antitrust policy. First, antitrust policy should shift its focus from price competition without technological change to address non-price aspects of innovation competition. Secondly, antitrust policy should apply economic analysis that recognizes the critical role of Intellectual Property and technology standards in innovation competition. Thirdly, antitrust policy toward horizontal and vertical mergers should consider developments in the economic analysis of innovation competition. [ABSTRACT FROM AUTHOR]

This article introduces a comprehensive model of the market for inventions that examines how both supply-side competition and demand-side competition affect the incentive to invent. Supply-side competition refers to competition among inventors and demand-side competition refers to competition among producers in the downstream product market. The main results are as follows. Competing inventors have greater average expected returns to invention when the downstream market is competitive than when the downstream product market is monopolistic, so downstream competition increases the incentive to invent. A multi-project monopoly inventor has greater incremental expected returns to invention when the downstream market is competitive than when it is monopolistic, so downstream competition again increases the incentive to invent. On the supply side, competition among inventors generates more R&D projects than a multi-project monopoly inventor when the demand side of the market for inventions is competitive. The reason for this result is that when the downstream market is competitive, the average expected returns to invention with competition among inventors are greater than the incremental expected returns to invention with a multi-project monopoly inventor. [ABSTRACT FROM PUBLISHER]

I examine a three-stage model of Schumpeterian competition among entrepreneurs. In the initial entry stage, entrepreneurs invest in innovation and establish firms. In the next stage, entrepreneurs choose prices strategically, make irreversible investments, and compete to serve consumers, while faced with asymmetric information about each others’ innovations. In the final creative destruction stage, firms with better technologies remain in the market while firms with inferior technologies exit the market. The model features strategic pricing by firms and the possibility of heterogeneous technologies remaining in the market. The model provides a necessary and sufficient condition for creative destruction. [ABSTRACT FROM PUBLISHER]

The analysis provides conditions under which standard setting organisations (SSOs) choose efficient technology standards. I introduce a two-stage game with both voting and market competition. In equilibrium, standards and market outcomes are efficient even with market power from scarce capacity and standard essential patents (SEPs). I show that a drastic innovation with SEPs generates greater social welfare than a less efficient standard without SEPs. A key finding is that voting power and market power have counterbalancing effects. The discussion helps explain empirical observation of differences in SSO voting rules, intellectual property (IP) rules, membership and alliances. [ABSTRACT FROM AUTHOR]

The paper addresses the question of pricing access to the network facilities of an incumbent firm after deregulation. Network access pricing continues to be regulated in such industries as telecommunications, railroads, electric power and natural gas. We emphasize that access prices should be set such that they satisfy an individual rationality condition for the incumbent firm so that access is granted voluntarily. We examine the effects of the voluntary access condition on incentives for entry and show that properly chosen access prices provide incentives for efficient entry using several alternative competition models: Bertrand-Nash, Cournot-Nash and Chamberlin competition with differentiated products. [ABSTRACT FROM AUTHOR]

The article develops a comprehensive framework demonstrating how patents provide the foundation of the market for inventions. Patents support the establishment of the market in several key ways. First, patents provide a system of intellectual property (IP) rights that increases transaction efficiencies and stimulates competition by offering exclusion, transferability, disclosure, certification, standardization, and divisibility. Second, patent transfers constitute what the article terms "the market for innovative control" that provides incentives for efficient investment in invention, innovation, and complementary assets. Third, patents as intangible real assets promote the financing of invention and innovation. The market foundation role of patents refutes the economically incorrect "rewards" view of patents. The discussion considers how economic benefits of the market for inventions should guide IP policy and antitrust policy. [ABSTRACT FROM AUTHOR]

Industries with technological standards can be highly competitive and innovative. The modern approach to Innovation Economics understands that technology standards, the competitive conduct of firms, and the economic performance of innovative industries are endogenous and jointly determined. Market competition and standards organizations endogenously determine technology standards, which are consistent with innovative efficiency. This contrasts with traditional Innovation Economics, which can be summarized as a “Standards-Conduct-Performance” paradigm. The traditional view, which is reminiscent of the traditional Industrial Organization “Structure-Conduct-Performance” paradigm, incorrectly assumes that technology standards are exogenous and cause imperfectly competitive conduct and inefficient economic performance. Instead, studies of innovation should apply game-theoretic models that account for strategic interaction and empirical tools that control for the interplay among technology standards, competitive conduct, and economic performance. [ABSTRACT FROM AUTHOR]

In its recent report entitled, “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) proposes a far-reaching regulatory approach (Proposal) that is likely to interfere with the intellectual property (IP) marketplace, decreasing both the innovation and commercialization of new technologies. The FTC Proposal relies on non-standard and misguided definitions of economic terms of art such as “ex ante” and “hold-up,” and advocates new inefficient rules for calculating damages for patent infringement. The Proposal would so reduce the costs of infringement that the rate of infringement would increase as potential infringers find it in their interest to abandon the voluntary market in favor of judicial pricing. As the number of nonmarket transactions increases, courts will play an ever larger role in deciding the terms on which the patented technologies of one party may be used by another party. That will do more than reduce the incentives for innovation; it will upset the current set of well-functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. And that would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote. Like the FTC Proposal, we focus here within the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC's proposed definitions of “reasonable royalties” and “incremental damages” become the rules for calculating patent damages the FTC and private actors will be well poised to attack, after the fact, all standard pricing methods through some combination of antitrust litigation or direct regulation on the ground that even time-honored voluntary royalty arrangements result from some purportedly undue power of IP. The FTC's Proposal may encourage potential licensees to adopt the very holdout strategies the FTC purports to address and that well-organized SSOs routinely counteract today. The FTC's proposal for regulating IP by limiting the freedom of SSOs to set their own terms would thereby replace private coordination with government hold-up. We conclude that the FTC should abandon its Proposal and support the current set of licensing tools that have fueled effective innovation and dissemination in the IP marketplace. FTC forbearance will improve bargaining incentives, reduce administrative costs, and remove unnecessary elements of legal uncertainty in the IP system, thereby advancing consumer welfare. [ABSTRACT FROM AUTHOR]

This article extends antitrust analysis to two-sided markets in which a virtual monopolist competes with local bricks-and-mortar dealers. The discussion examines the market power of an Internet market maker as well as an Internet matchmaker. The analysis shows that equilibrium in a two-sided market can be characterized as a one-sided market in which transaction demand depends on the bid-ask spread of the central market maker. This allows for a straightforward extension of critical demand elasticity and critical loss analysis from one-sided markets to two-sided markets, with antitrust tests based on the hypothetical monopolist's bid-ask spread. Antitrust analysis of a one-sided market also carries over to a two-sided market with a matchmaker where antitrust tests are based on the sum of participation fees. [ABSTRACT FROM PUBLISHER]

In this article, I define business method inventions and provide an economic framework to address the question of patentability raised in Bilski. A business method invention is the discovery of a commercial technique that firms can apply to address market opportunities. The initial implementation of a business method invention by firms is a Schumpeterian innovation. I advance several arguments in favor of business method patentability. Business method inventions are an important foundation for entrepreneurship and a channel for the commercialization of scientific and technological inventions. IP protections for business method inventions are essential for economic efficiency, including incentives for invention, efficient allocation of inventions, and transaction efficiencies in the market for discoveries. Business method inventions are significant because they are the foundation of what I term the ''Business Revolution'': the augmentation and replacement of human effort in business transactions by computers, communications systems, and the Internet. I conclude that the patent system should continue to provide intellectual property protections for business method inventions just as it does for other types of inventions. [ABSTRACT FROM AUTHOR]

A model of market making by firms with heterogeneous consumers, suppliers and price-setting intermediaries is examined Consumers and suppliers engage in time-consuming search for the best price and discount future returns. There exists a unique symmetric equilibrium pricing strategy. In equilibrium, there are non-degenerate distributions of ask and bid prices that straddle the Walrasian price As the discount rate goes to zero, the ranges of the bid and ask prices, and the total output approach the Walrasian equilibrium values As the discount rate becomes large, the ask and bid prices approach the monopoly pricing policies. An increase in the discount rate leads to an increase in the equilibrium number of active firms, profit per firm, the mean spread between ask and bid prices, and the variance of ask and bid prices, while lowering the number of active consumers and suppliers. The model is extended to examine the steady-state market equilibrium with continual entry and exit of consumers and suppliers [ABSTRACT FROM AUTHOR]

Discusses the merger and equilibrium antitrust policy in the U.S. Evaluation of mergers under the antitrust laws; Merger standards set in the country; Mathematical models of pre-merger market structure.

Discusses the instruments of control over agencies that are employed by the legislature and executive branch. Basic framework of environmental regulation; Factors that contribute to the differences in the preference between the president and appointed administrators of the regulatory agencies; Role of statutes in administrative regulation.

Examines auctions and contract enforcement in the U.S. Role of auctions for contracts in eliciting accurate information about supplier costs; Factors that result in the accuracy of cost information revealed by competitive bidding; Allocation of franchise contracts and contracts for the production of goods and services.

Discusses a study which examined the Cournot-Nash equilibrium enforcement and offenses and its implications for the optimal design of a public policy. Analysis of the choice of a game structure; Consequences of Stackelberg enforcement model for delegation; Application of Cournot-Nash model to the enforcement of legal standard.

We have presented a strategic model of antitrust enforcement which studies the effect of asymmetric information on optimal antitrust policy and equilibrium firm behaviour. We find that it is optimal to induce a low-cost industry to engage in price-fixing. Our result holds no matter how small are enforcement costs. Thus, even though price-fixing cases may be relatively routine and inexpensive to initiate (relative to, say, monopolisation cases), an optimal antitrust policy under asymmetric information should still `tolerate' some collusion. A restrictive aspect of our analysis is its static nature. Antitrust enforcement often involves monitoring efforts that are carried out over a period of time with repeated interaction between the antitrust authority and the firms. The occurrence of repeated strategic interaction implies that the antitrust authority may learn about the costs of firms over time. Further, the dynamic pricing strategies of firms and enforcement strategies of the antitrust authority may differ greatly from the static leader-follower framework studied here. A related issue is that economy-wide effects of antitrust enforcement are ignored.[25] If firms are uncertain about the antitrust authority's ability to commit, it may be beneficial for the authority to create a reputation for toughness by prosecuting cases in which the social benefits from winning are relatively small. A third weakness of our model is that the antitrust authority and the industry are not permitted to settle out-of-court before a trial occurs. Strategic models of pretrial settlement have been analysed in the context of criminal law and of torts but not in an antitrust setting.[26] These limitations of the static, full-commitment model emphasise the need for additional modelling of antitrust policy. [ABSTRACT FROM AUTHOR]

A model of endogenous price adjustment under money growth is presented. Firms follow (s,S) pricing policies, and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears, and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment. [ABSTRACT FROM AUTHOR]

An introduction is presented in which the editor discusses various articles within the issue on topics including antitrust policy, public policy, and innovation and economic growth.