Debunking Predatory Innovation

AbstractJ. Gregory Sidak

Since 1975, when the debate over monopolistic predation began to boil in courts and universities, most discussion has focused on predatory pricing. And although the allegation of predatory innovation arose in some well-known litigation involving Kodak and IBM, lawyers and economists have produced little credible work explaining how this phenomenon can occur, let alone how it should be identified and remedied if deemed to threaten consumer welfare. This is not surprising: A legal rule defining predatory innovation-if there is to be any rule-is even more problematic to articulate than the optimal predatory pricing rule, for it must balance public policies discouraging monopolistic predation against not only those policies encouraging aggressive competition but also those encouraging innovation.

Now, just when the predation kettle appeared to be simmering again on the back burner, Professors Ordover and Willig have argued that even genuine innovations-new products that in some ways are superior to existing products in the eyes of both engineers and consumers-are in some circumstances anticompetitive. To deal with this perceived antitrust problem, Ordover and Willig propose a model of predatory marketing of product innovations that is flawed in theory and unworkable in practice.

Both the existing law on predatory innovation and the Ordover-Willig model are primarily concerned with the problem of predatory systems rivalry through technological tie-ins. Part I describes first the phenomenon of systems rivalry and then the circumstances under which Ordover and Willig believe it may give rise to an antitrust problem. Parts II and III argue that the Ordover-Willig model overlooks many of the efficiency-enhancing characteristics of technological tie-ins. Many of the points raised have been made by earlier commentators with respect to contractual tie-ins. One major weakness of the Ordover-Willig model is that, by failing to explore the economic similarities between contractual and technological tie-ins, it overlooks the efficiency-enhancing characteristics common to both.

Part II argues that Ordover and Willig have underestimated the importance of price discrimination as a motive for systems rivalry, and that they have overlooked the beneficial consequences of a price discrimination strategy. Part III discusses other socially desirable characteristics of technological tie-ins, and argues that the Ordover-Willig model fails to consider how the decision to invest in innovation is constrained by legal and economic factors that limit an innovator’s ability to exclude others from free-riding on his creation of new information. Part IV discusses various possible antitrust standards for technological tie-ins, and concludes that a rule of per se legality is at least preferable to any rule of reason yet proposed, and probably the socially optimal rule for predatory innovation.

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