Intellectual Property and Competition

A legal system that relies on private property rights to promote economic development must consider that profits can come from two different sources. First, both competition under constant technology and innovation promote economic growth by granting many of the returns to the successful developer. Competition and innovation both increase output, whether measured by quantity or quality. Second, however, profits can come from practices that reduce output, in some cases by reducing quantity, or in others by reducing innovation.IP rights and competition policy were traditionally regarded as in conflict. IP rights create monopoly, which was thought to be inimical to competition. By contrast, competition policy values free entry and asset mobility, which IP rights limit in order to create incentives. Today our view of this relationship is more complex. First, most IP rights are insufficient to produce durable monopoly, although they do facilitate product differentiation. Second, we tend to see IP rules as creating a property rights system in which competition exists for the property rights themselves. Firms compete by innovating and appropriating whatever payoffs they are able to capture, including IPRs. Third, we define competition in terms of output or welfare rather than simple rivalry. A market structure or practice that increases output is more "competitive" than a lower output alternative, even though the amount of daily rivalry among firms is less. For example, output in the cellular phone market is much higher because hardware, software, and telecommunications links are all networked by cooperative agreements and standard setting.Under conventional neoclassical assumptions, both innovation and competition increase output, whether measured by the number of units or their quality.At the same time, however, excessive IP protection limits competition by reducing asset mobility further than necessary to facilitate innovation. Excessive antitrust enforcement can also limit asset mobility by benefiting select businesses at the expense of consumers. The policy trick is to find the "sweet spot" where the aggregate effects of IP and competition policy are optimized.