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    Antitrust Law Journal

    Volume 84, Issue 1

    Innovation Under Section 2 of the Sherman Act

    Richard J. Gilbert and A. Douglas Melamed

    Dec 02, 2021

    95 min read

    Antitrust Exclusionary Conduct Media & Technology Monopoly Power Unilateral Conduct

    Summary

    • Innovation is critical for antitrust enforcement, but it is complicated by the uncertain link between structural measures of the potential for innovation, such as R&D spending, and the generation of new or improved products 
    • Conduct that enables a firm to gain or maintain monopoly power over the relevant R&D assets, and thus its ability to suppress innovation, will tend to reduce innovation unless that conduct also increases the defendant’s incentive to innovate, e.g., by increasing its ability to appropriate the benefits of innovation. The key issue then becomes whether, as a consequence of such conduct or merger, the defendant has gained or maintained monopoly power over either relevant R&D assets or a product market that is likely to reduce innovation compared to the but-for world.
    Innovation Under Section 2 of the Sherman Act
    anucha sirivisansuwan via Getty Images

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    Recent complaints filed by the Department of Justice, the Federal Trade Commission, and numerous state attorneys general allege that Google and Facebook acquired and maintained monopolies in violation of the antitrust laws. The case brought by the DOJ and several states alleges that Google’s payments for default status on devices that access the internet and its agreements that require Android mobile phone licensees to install Google search and other Google services deny rivals scale to compete effectively and thwart potential innovation. The complaint alleges:

    "By restricting competition in general search services, Google’s conduct has harmed consumers by reducing the quality of general search services (including dimensions such as privacy, data protection, and use of consumer data), lessening choice in general search services, and impeding innovation."

    The FTC complaint against Facebook alleges that it engaged in conduct that “deprives personal social networking users in the United States of the benefits of competition, including increased choice, quality, and innovation.”

    Google and Facebook have characteristics that set them apart from most corporate goliaths that have attracted antitrust scrutiny in the past. They operate two-sided platforms that serve both consumers and advertisers. Consumers do not pay a monetary price to query the internet using Google’s search engine or to interact with friends on Facebook. Google and Facebook are able to offer these services without monetary compensation because the services attract consumer attention and enable the collection of personal information that enhances the value of the services sold by the companies to advertisers. The companies also stand out because they embody the rapid technological change, and thus innovation, in online services that has transformed business and leisure.

    Although the Google and Facebook cases include allegations of price effects for advertisers, the most significant harm to consumers attributed to the alleged conduct relates to the quality and innovation of services. Concerns about innovation were also addressed in the report of the majority staff of the Antitrust Subcommittee of the House Judiciary Committee, which called for heightened antitrust scrutiny of “products [that] appear to be ‘free’ but are monetized through people’s attention or with their data,” and in President Biden’s recent executive order on promoting competition, which emphasized the role of antitrust in promoting “competition and innovation.”

    The emphasis on innovation in these documents might be just rhetoric or a nod to the tech content of these cases. It might also signal an increased role for innovation in the enforcement of Section 2 allegations in the high-technology economy. If so, that would be a welcome signal. Innovation is far more important for economic welfare than avoiding deadweight loss from monopoly prices.

    Continue reading the full text of this article and citations in PDF format.

    The authors are grateful to Robby Robertson, the editors, and anonymous referees for helpful comments.

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