The Supreme Court, Market Structure, and Innovation: Chakrabarty, Rohm and Haas

• Author: Martin J. Adelman
• Published date: 01 June 1982
• DOI: 10.1177/0003603X8202700206
• Date: 01 June 1982
• Subject Matter: Article

The Antitrust Bulletin/Summer 1982 457

The Supreme Court, market structure,

and innovation: Chakrabarty, Rohm

and Haas

BY MARTIN J.

ADELMAN·

Introduction

In a provocative 1979 article published in this journal, Professor

Ginsburg discussed various aspects of the relationship between

antitrust law and technological innovation.' He argued that anti-

trust authorities ought to be concerned with two things: (1) aiding

the creation of market structures that are conducive to technolog-

ical innovation,

and

(2) avoiding actions which serve to weaken

patent incentives. Professor Ginsburg's analysis treated these two

recommended goals as separate and distinct. They are not, for

the proper market structure to encourage technological innova-

tion in an industry depends on the operation

of

the patent system

in that industry.

•Professor

of

Law, Wayne State University Law School, Detroit,

Michigan.

IGinsburg, Antitrust, Uncertainty, and Technological Innovation, 24

ANTITRUST

BULL.

635 (1979).

Part

I

of

the article is entitled "Industrial

Market Structure and Technological Innovation" and

Part

III is entitled

"Patent

Licensing and Antitrust Relief."

©1982 by Federal LegalPublications, Inc.

458 The antitrust bulletin

This relationship is best understood by asking two questions:

(1) What market structure best permits the innovator to privately

capture the value

of

his innovation? and (2) What market

structure is most cost efficient for innovation? The answer to the

first clearly depends on the existence and strength

of

the patent

system affecting that market. One way to see this relationship is

to assume that amonopolist successfully makes an invention

within a monopolized market. Then, when the monopolist ex-

ploits this invention, competitors cannot free-ride on the mono-

polist's inventive efforts. After all he is a monopolist. The

existence

of

apatent system would have little effect on such a

monopolist's incentives to invent, for there are no competitors to

free-ride on its efforts.' At the opposite end

of

the spectrum,

where the market structure creates no serious barriers to imita-

tion, as in a highly competitive environment, strong patent

incentives are essential. Without astrong patent system, competi-

tors can freely appropriate the wealth created by innovation and

hence, substantially diminish incentives to invent. The weaker the

patent system the greater the need for market barriers to competi-

tion in order to provide the necessary incentives. With a strong

patent system which itself prevents free-riding and provides

ample incentives to invent, the need for a particular market

structure to perform this function declines. The patent system in

a competitively structured market is thus a substitute for the

barriers to imitation that flow from substantial market power.

Economists have studied the relationship between market

structure and innovation extensively. Much

of

this work was

2The monopolist has every incentive to introduce cost reducing

inventions because lowering costs increases a monopolist's profits.

Product improvement presents a somewhat different picture if the

monopolist leases rather than sells its products. Then the introduction

of

an improved product by a monopolist would reduce the value

of

the

leased products owned by the monopolist. Thus the incentive

of

a

monopolist to make product improvements can be affected by its

decision to lease rather than sell its machines, since if the monopolist

only sells its products the decline in value

of

its previously sold products

caused by the introduction

of

an improved product would fall solely on

its customers rather than itself.