Evaluating Innovation Theories of Harm in Merger Review: Economic Frameworks and Difficulties

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The authors discuss recent life science cases that deal with innovation theories of harm, and what economic models can be useful in reviewing proposed mergers in this space.

Several recent high-profile merger review cases in the life sciences space have focused on so-called innovation theories of harm—a concern that the merger may decrease the level of innovation activities by the merging parties or their competitors and harm consumer welfare. While evaluating such theories of harm is understandably of high interest, antitrust authorities should recognize that innovation is an area that does not lend itself to generalizations of a single economic theory or model.

While generalizing the production function for widgets as a mathematical function works well enough, innovations are not like widgets, and using the same approach can lead to three fundamental problems.

  • While specific mathematical models and functions may describe certain situations well, they do not generalize to the broader universe of innovative activity.
  • Evidence in these cases is plagued by definitional and measurement problems that are worse than usual for merger assessment since the underlying concepts to be measured or tested are not well specified.
  • Remedy policies are difficult to identify for these cases without necessarily assuming some specific way in which innovation is produced.

In this chapter, authors Bob Majure, Nathan Hipsman, and Jessica Liu summarize each of these categories of challenges; discuss some approaches and considerations employed in past cases; and explain why a good model of innovation, rooted in the facts of the industry, is the best approach.

This chapter was originally published by Lexology in Getting the Deal Through—Merger Control 2021.


The views expressed in this chapter are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research.

Evaluating Innovation Theories of Harm in Merger Review: Economic Frameworks and Difficulties

Authors

  • Washington

W. Robert Majure

Vice President

  • Washington

Nathaniel E. Hipsman

Manager