Innovation, Antitrust Enforcement, and the Inverted-U

The effects of monopoly power or mergers on incentives to innovate are important issues for antitrust enforcement, but they receive relatively little attention in litigated cases compared to the analysis of predicted effects on prices. This paper reviews what is known about the relationship between market structure and innovation and its implications for antitrust enforcement. A focus is on the significance of the inverted-U result in dynamic markets identified in research by Philippe Aghion, Peter Howitt, and their co-authors. We note that these results do not apply directly to mergers. A merger creates a negative externality by eliminating the incentive of each merging party to invest in an innovation that takes sales from the other party. However, mergers also can create a positive externality for innovations that expand the merged firm’s demand or accelerate discovery. We conclude that the net effects for innovation from mergers and from the acquisition or maintenance of monopoly power depend importantly on the extent to which mergers or monopoly power increase existing profits that are jeopardized by innovation