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Competition and Innovation: Did Arrow Hit the Bull's Eye?

Competition and Innovation: Did Arrow Hit the Bull's Eye?

(p.361) 7 Competition and Innovation: Did Arrow Hit the Bull's Eye?
The Rate and Direction of Inventive Activity Revisited
Carl Shapiro
University of Chicago Press

This chapter, which offers a synthetic assessment of how the lessons of the economics of innovation inform merger analysis, contrasts two dominant perspectives that inform merger analysis: Arrow versus Schumpeter. Where the Arrow approach suggests the positive impact of product market competition on innovation, the Schumpeter perspective focuses instead on the innovation inducements due to scale, and looks upon the prospects of market power. Innovation is enhanced when (1) firms have the prospect of either gaining or protecting sales by providing additional value to consumers (the Contestability Principle), (2) the level of intellectual property protection is higher (the Appropriability Principle), and (3) complementary assets can be combined to enhance innovative capabilities (the Synergy Principle). Illustrating the role of these principles in clarifying the innovation impact of mergers in particular cases and circumstances, careful economic analysis helps to clarify policy analysis and how long-standing conceptual frameworks can be enriched by careful, formal reconsideration.

Keywords:   competition, innovation, merger analysis, Contestability Principle, Appropriability Principle, Synergy Principle

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