The Paradox of Antitrust Actions

The Paradox of Antitrust Actions

Patenting activity alone may not be a reliable indicator of innovation or commercial success, especially for smaller players in a given industry.

The debate over whether antitrust actions promote innovation and competition has become a hot topic in recent times, particularly in the tech industry. This was evidenced in the 2022 Ticketmaster fiasco, where the platform failed in its obligation to provide reliable service for Taylor Swift’s Eras tour. Amy Klobuchar, Chair of the Senate Judiciary Subcommittee on competition policy, antitrust and consumer rights, singled out Ticketmaster’s control of 70% of the ticketing and live event market as the reason for the system’s meltdown. To stimulate innovation and competition, antitrust action was deemed necessary. However, according to recent research, this action may not always produce meaningful outcomes, even if innovation in some form may increase.

An investigation published in the Strategic Management Journal focused on the aftermath of the Microsoft antitrust case of the late 1990s and early 2000s. The study assessed the impact of antitrust regulatory intervention on technical and product innovation in the enterprise infrastructure software industry. The research revealed that technical innovation, represented by patenting, increased following regulatory intervention against the dominant company. Conversely, commercialisation, the monetisation of these patents, did not. Moreover, profits declined across the market, with the most technically innovative companies experiencing the worst losses.

It is thus crucial to understand the paradox of antitrust actions and how they can impede competition instead of stimulating it – as well as the ensuing implications for complementors, platforms, and regulators.

An Antitrust Experiment

The study focuses on platform ecosystems and complementors, where companies depend on the platform for technical infrastructure and customer access but aren’t in competition with it. Sometimes, complementors may offer rival services, and when they do, the platform has the power to give its own offerings unfair advantages, thus stifling innovation. This dynamic was illustrated in the high-profile antitrust cases against Google and Microsoft Teams.

In 2022, Google and the European Union settled their long-running dispute with the EU General Court upholding the decision that Google’s Android platform had given an unfair advantage to its own search engine and browser apps. Antitrust authorities in India reached a similar conclusion. In another case, a complaint was filed against Microsoft by the workplace communications app Slack. Microsoft was accused of promoting its own app, Teams, on the Microsoft Office platform to prevent businesses from using Slack.

The “browser wars” of the landmark Microsoft antitrust case of over two decades ago were an early example of this phenomenon. The enterprise infrastructure software market, which supported back-end functions such as database management, email servers, and IT security, offered a lesser-known case of this dynamic. At the time, Microsoft’s Windows Server operating system was the dominant platform for this type of software. Five major sub-markets existed: application integration, developer tools, database management, network and system management, and IT security.

After the 2001 settlement, Microsoft’s position in the two markets where it previously dominated, developer tools, and database management, was weakened, and a newly opened space for competition allowed for fresh ideas. This created an unusual quasi-natural experiment that researchers could analyse. The study looked at technical innovation, profitability, commercialisation, and firm entry in the five markets between 1998 and 2004, three years before and after the antitrust settlement. Additional analyses were conducted in the decade following the settlement.

In the control group, consisting of the three markets where Microsoft had little presence, innovation and profitability remained unchanged. However, in the treated group, where Microsoft was a key player, technical innovation increased significantly, indicating a newfound space for competition. Specifically, the study noted a flurry of patent activity among complementors with low market shares in the treated group. However, these patents did not result in significant commercialisation activity, such as new product introductions or increased sales. In fact, the study found that the treated group’s overall innovation output remained largely unchanged despite the increase in patenting activity.

The researchers suggested several possible explanations for these findings. One possibility is that complementors with low market shares may lack the resources or capabilities to effectively commercialise their innovations, even if they are successful in obtaining patents. Another possibility is that these complementors may be patenting defensively, simply to protect their intellectual property from infringement by larger competitors.

Overall, the study suggests that patenting activity alone may not be a reliable indicator of innovation or commercial success, especially for smaller players in a given industry. Instead, complementors may need to focus on developing their overall innovation capabilities, building strategic partnerships, and pursuing targeted commercialisation strategies in order to truly capture value from their innovations.

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