Introduction to the Law and Economics of Technology Industries

• Pages: 1-44

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CHAPTER I

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 agencies—the

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

remedies.

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 http://www.ftc.gov/sites/default/files/documents/

public_statements/merger-enforcement-high-techmarkets/130128

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

https://www.justice.gov/atr/file/518956/download.

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

http://www.mooreslaw.org. Commentators have recently noted, however,

that the rate at which computing power is advancing is slowing. See, e.g.,

Tom Simonite, Moore’s Law Is Dead. Now What?, MI T TECH. REV.

(May 13, 2016), available at https://www.technologyreview.com/s/

601441/moores-law-is-dead-now-what.

5. Patenting by Geographic Regio n (State and Country), Breako ut by

NAICS Industry Classification, available at http://www.uspto.gov/

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 http://www.wipo.int/

edocs/pubdocs/en/statistics/943/wipo_pub_943_2013.pdf.