Innovation Markets after Genzyme/Novazyme

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Richard Gilbert, Jul 12, 2008

The U.S. Federal Trade Commission alleged adverse effects on innovation in about forty percent of all merger challenges between 1996 and mid-2008. The percentage was much higher for challenges in industries with unusually high research and development intensity, such as pharmaceuticals (excluding generics), chemicals, software, instruments, high-tech manufacturing, defense, and aerospace. The FTC challenged sixty-three proposed mergers or acquisitions in these industries and alleged adverse innovation effects in fifty-seven cases, or about ninety percent of the challenged transactions. The percentage of merger challenges in R&D-intensive industries that alleged adverse effects on innovation has been high throughout the past decade.

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Is it likely that an antitrust enforcement agency will challenge a merger or other business arrangement solely because the arrangement creates adverse incentives for innovation? Some would argue that insurmountable obstacles prevent antitrust enforcers from pursuing a pure innovation case, including the following: 1. With the exception of contract R&D, there is no market in which R&D is bought and sold. 2. R&D is an input to innovation and bears an uncertain relationship to innovative output. 3. There is no solid body of economic theory and empirical research on which to base predictions of the effects of changes in market structure or business conduct on innovation. I discuss these potential obstacles in light of the Genzyme/Novazyme decision and recent economic developments pertaining to competition and innovation.

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