Introduction to the Law and Economics of Technology Industries

This handbook considers issues of antitrust law and economics in
technology industries—those industries centered around information
technology, including software and hardware for computers, mobile and
embedded devices, networking, and rapidly growing cloud-based
industries such as social media. Competition in these industries occurs at
several levels: final products (“downstream” products such as
smartphones and personal computers); intermediate goods used in their
production (e.g., semiconductors and display panels); and the
technologies and intellectual property that make the development and
production of such products possible.
Technology industries frequently exhibit intense price and non-price
competition. These two forms of competition are often interrelated. Non-
price competition among technology firms may take the form of process
innovation, when suppliers seek to reduce their marginal costs by
implementing more efficient manufacturing methods (thereby permitting
them to charge lower prices), or by engaging in product innovation
(which can lower their costs of production or create a competitive
advantage for the supplier by offering new product capabilities, in each
case allowing them to charge less, creating pressures for competitors to
offer lower prices or to innovate in response). These forms of
competition generate what most consider to be the hallmark of
technology industries—products of ever-increasing complexity,
capability, or ease of use, often at prices that drop over time.
The resulting technological and product improvements, and falling
prices, have contributed significantly to improving consumer welfare.
Government enforcers and private parties seek to stop or deter
anticompetitive conduct that threatens such benefits. Of course, an
important policy question emerges—what is the appropriate amount of
enforcement? Many argue that the antitrust laws work too slowly to stop
harms before new technologies brush aside both the threatened products
and the bad actors; others claim that dynamic industries are immune to
anticompetitive conduct.
2 Handbook on Antitrust in Technology Industries
The rapid innovation that fosters the frequent emergence of new
technology products can also result in inventors or “rapid followers”
swiftly achieving market power, at least in the short run. Such firms
might try to protect their market positions through anticompetitive
means. However, credible threats of costly antitrust enforcement
litigation can deter firms from engaging in such anticompetitive conduct,
even in the technology context.
Another challenge is avoiding misapplication of the antitrust laws
that would punish what in fact is competitive behavior. Even when such
actions fail, the time and expense of defending against such challenges
may deter future innovators.
The purpose of this chapter is not to opine on the utility or
appropriateness of the antitrust oversight of technology markets, but
instead to explain how it is done. U.S. antitrust agenciesthe
Department of Justice (DOJ) and Federal Trade Commission (FTC)
“can and do[ ] enforce the antitrust laws in fast-moving high-tech
markets,”1 because “[v]igilant protection of competition is particularly
important in technology industries,” given their “potential to grow our
economy and raise consumer welfare through the introduction of new
technologies, products and methods of doing business.”2
The following sections explore the characteristics of technology
industries and how antitrust agencies and courts have considered the
impact of these issues in antitrust analyses and in crafting enforcement
A. Selected Characteristics of Technology Industries and Markets
Competition in technology industries is frequently characterized by
rapid innovation and intense price competition. Such innovation has the
potential to undermine the market power incumbents might have. These
1. Julie Brill, Comm’r, Fed. Trade Comm’n, Merger Enforcement in High-
Tech Markets, Skadden Arps/Compass Lexecon Symposium (Jan. 28,
2013), available at
skaddenhightechmarkets.p df.
2. Fiona Scott-Morton, Deputy Ass’t Att’y Gen., Antitrust Div., U.S. Dep’t
of Justice, Antitrust Enforcement in High-Technology Industries:
Protecting Innovation and Competition, Remarks as Prepared for the
2012 NYSBA Annual Antitrust Forum 1 (Dec. 7, 2012), available at
Introduction to the Law and Economics of Technology Industries 3
rapid innovations have been estimated to account for a sizable majority
of American economic growth.3
A firm’s ability and incentive to innovate depends, among other
things, on the characteristics of the markets in which it operates. These
factors could include the existence and magnitude of network effects or
switching costs; the essentiality of intellectual property that firms use to
develop or supply their products; the tactics and business strategies of the
owners of such intellectual property, and, closely related, the nature of
industry standard-setting processes; and, the extent to which
interoperability among products is desirable or costly.
1. Rapid Innovation
Rapid product and/or process innovation is a hallmark of technology
industries. Both effects have given rise to Moore’s Law: the observed
tendency (and resulting prediction) that microprocessors double in power
every two years.4 This increase in processing power means computers are
increasingly more powerful, which in turn encourages the development
and use of more complex and capable software and peripheral devices.
This innovation contributes to the dynamism of the computer industry
and to the fact that the majority of U.S. patents are awarded to computer
and electronic products.5
The rapid emergence of new or improved products in turn leads to
short product lifecycles, as consumers constantly shift to the latest and
greatest products. In contrast to more stable “smokestack” industries,
3. See generally Robert M. Solow, A Contribution to the Theory of
Economic Growth, 70 Q.J. ECON. 65 (1956).
4. Intel co-founder Gordon Moore observed that the number of transistors
per unit of area on a chip had doubled each year since the invention of the
microchip, and he conjectured that this trend would continue. See Commentators have recently noted, however,
that the rate at which computing power is advancing is slowing. See, e.g.,
Tom Simonite, Moores Law Is Dead. Now What?, MI T TECH. REV.
(May 13, 2016), available at
5. Patenting by Geographic Regio n (State and Country), Breako ut by
NAICS Industry Classification, available at
web/offices/ac/ido/oeip/taf/naics/stc_naics_fg5/usa_stc_naics_fg.htm; see
also WIPO IP Facts and Figures fig. B.4 at 16 (2013) (listing patent
applications by field of technology), available at

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