Should innovation, having superior welfare effects, be the focal point of cp, instead of price competition?
the assumption here is that there is an offset between innovation and (price) competition, Underlying this assumption is the view that innovation is the main ew motor…It also
presupposes that (high) concentration helps innovation….but the latter presupposition is wrong because open competition is, indeed, an incentive for innovation.
the BER [block exemption regulation]:
1-exempts the grant of exclusivity by the licensor to the licensee and allows each
party to be protected against any competition, active or passive, from the other party
throughout the whole period of validity of the licensed patent, or, know-how
2-recognises that a maximum degree of contractual freedom must be
preserved for parties to transfer technology agreements. Thus it provides for a longer list of
obligations which the parties may lawfully include in their contracts (such as the right for
licensers to terminate the agreement if the licensee challenges the validity of the patent,
clauses protecting the secret nature of the licensed know-how and the obligation for
licensees to use their best endeavours to manufacture and market the licensed product);
3- the regulation lists also a number of clauses to prevent the exemption
from applying to the licence (restrictions on price and quantities, a ban on exploiting
competing technologies, customer restrictions between competing manufacturers,
obligations on licensees to assign improvements to the technology concerned, territorial
restrictions for a longer duration than those exempted). This “blacklist” has been reduced to
half the length of the list in the previous regulations;
4- an “opposition procedure” by which exemption is extended to agreements containing
additional restrictions on competition not specified in the regulation, on condition that such
agreements are notified to the Commission and that the Commission does not oppose the
application of the exemption within four months (as opposed to six months previously).
Clauses previously “blacklisted” such as an obligation on licensees to procure from the
licensor supplies which are not essential for a technically proper exploitation of the licensed
technology, are subject to this procedure.
However, the BER regulation gives a clear warning for companies with a strong market position: above 40 per cent market share, the licensee may have the benefit of the regulation withdrawn, if the licence prevents the licensed products being exposed to competition from identical or substitutable products. This principle has already been applied, for example in the Tetra Pak I case, where the licensee, who was in a dominant position, was forced to give up the exclusive rights attached to its licence
Are innovations increasing in pace?….if so, should this lead to changes in cp?
the assumption is that innovation is increasing in pace, thus innovation is the most important way of competition.
should cma.ec apply a more lax cp, or instead, a more vigilant cp, to hightechs(innovation)?
a) innovations that require relatively small resources (new flavour of
cookies etc.). An increase in the pace of innovation, and therefore a shortening of product
life cycles, makes collusion more difficult…so cp can be very lax.
b) innovations where learning is relatively unimportant.
This means that not having done R&D in that field already is not a problem. these type of innovations will erode market power…so cp can be very lax.
c) innovations concerning production processes. an increased pace of such innovations make collusion more difficult….so cp can be lax.
d) In sectors where innovations require large R&D resources and/or where learning is important (for example the development of a new generation of chips) an increase in the pace of innovation, increases entry barriers….so cop cannot be lax…..eg. the barrier to entry created by the development of a standard for decoders for digital television by one of the parties to the merger, who would also be involved in downstream activities.
will the ua or merger lead to a significant reduction in innovation pace or quality?
The first assumption is that concentration will lead to less innovation.
however, is very difficult to estimate the [concentration: innovation] ratio
The second assumption is that less R&D is bad.
however, this ignores uas/mergers that avoid duplication in R&D.
The third assumption is that is no problem defining the correct future innovation market
however, when innovation may occur in steps, or from unexpected R&D efforts (leapfrog model), the market definition becomes very difficult. Firms that may not be in the same market now may be so in the future for new products.
IP licensing is quintessentially an international activity….thus, licensing activities should receive major support from the OECD.
USA
FTC opinion: competition makes firms more innovative….One can imagine a merger of R&D competitors that facilitates innovation through reducing
wasteful duplication, creating scale economies and synergies and spreading risk. At the same time, such a merger may reduce innovation effort. However, just because a firm has the ability to reduce the pace or scope of R&D does not mean that it has the incentives to do so. On the other hand, the FTC has seen instances where a reduction in competition led to a reduction in innovation.
Market definition and assigning market shares are particularly challenging tasks in rapidly
changing sectors.
The current framework focuses on what consumers would do in response to
small but significant non-transitory increases in prices (i.e. the SSNIP test). Customers may,
however, be much more oriented towards comparing product performance than prices in innovation markets. In addition, in an attempt to gain the whole
market and thereby benefit from significant economies of scale and/or network effects, the
merging parties may temporarily be engaging in very low pricing….leading the SSNIP test to indicate an unduly narrow, instead of overly broad market.
When it comes to assigning market shares, the problems only get worse, in rapidly changing markets….Even if they are accurately estimated, merger induced changes in market shares are poorer predictors of changes in durable market power in innovation markets
UNITED KINGDOM
UK merger policy has the flexibility to take into account the dynamic (or long term) implications of a merger as well as the static (or short term) considerations.
three, inter-related markets in which competition takes place:
− innovation/R&D market;
− information/technology market;
− product market.
Competition in the product market improve static (short term) efficiency and this has often been the goal of cp.
Increasingly, however, dynamic (long term) efficiency is becoming a cp goal too. [ieL competition in the innovation/R&D market and the information/technology market]
Whether or not a static/dynamic balancing exists and should be taken into consideration in a
merger case will need careful, in-depth analysis on a case by case basis, including an analysis of the nature of innovation i.e. whether it is drastic or non-drastic.
dynamic efficiency effects on a merger are quite uncertain.
It should be noted that a static/dynamic trade-off could also exist in the other direction i.e. it is
possible to have a merger situation that does not have adverse static effects but does have adverse effects on dynamic efficiency. More generally, mergers can harm innovation as well as enhancing it.
case: the market for betting through interactive digital television (iDTV). This merger in a high innovation industry would have resulted in a monopoly that might have been
unnecessarily difficult to displace.
sos: “First-mover advantage alone is not a reason for viewing a merger as potentially
anticompetitive, since it can be a proper reward of risk or innovation. Investments to develop
new services are generally to be encouraged, as they should benefit consumers, but there is a
question whether the degree of protection afforded by the five-year period of exclusivity in the case at hand may be excessive and restrictive of competition.”…..a non-exclusive deal was subsequently reached.
Fair Trading Act 1973: two ways for a merger to qualify for investigation:
− The assets test: the gross value of the world-wide assets being taken over exceeds£70 million.
− The share of supply test: the merged enterprises will together either supply or acquire goods
or services of a particular description and will – after the merger takes place – supply or
acquire 25 percent or more of those goods or services, in the UK as a whole or in a
substantial part of it.
These tests do not involve defining the relevant economic market at the outset and therefore
reduce the risk of not investigating a merger in a high innovation industry simply because of spurious market definition.
in cases involving high innovation [= where competition is for the
market rather than in the market], market share and concentration levels do
not provide an accurate reflection of market power. Accordingly, in these cases, less emphasis will be placed on market shares and concentration levels.
defining a relevant market is difficult in a high innovation industry and market share figures, change rapidly and may therefore not be a good indication of medium-long term market power.
The conditions generally prevalent in innovation intensive markets:
severe economies of scale, lack of capacity constraints, “tippy” markets, highly differentiated products – are not particularly conducive to collusion… This is why cma has barely found yet any co-ordinated effects or cartels in high innovation mergers.
innovation mergers’ anticomps is more likely to happen through vertical foreclosure. , as they use complementary products in vertically related markets. Companies that are
dominant in one market might seek to merge with a firm established in a vertically related market. The merged entity can then exploit complementarities between its portfolio of goods to foreclose the downstream market to other players….eg: Microsoft/Telewest case, theBSkyB/Hilton Group case and a case involving the software industry.
Horizontal mergers in high innovation markets may also exclude competitors by using the
enhanced position in the primary market to foreclose vertically related markets. For example, Vivendi’s proposed acquisition of a shareholding in BSkyB21 involved the bringing together of their two different conditional access technologies (SECA and NDS respectively), which together accounted for more than 60 percent of all pay-TV subscribers within the EC.
Network externalities occur when the utility that a user derives from consumption of the good
increases with the number of other agents using the good. A critical mass of users can “tip” the market to a monopoly provider. When switching costs are high, consumers can become “locked in” to a particular technology, which may represent a significant barrier to entry.
Network effects played an important role in the OFT’s analysis of the merger between Microsoft and Telewest…cma considered the possibility that network effects may help Microsoft to foreclose the market