Three Faces of Innovation Competition: Choosing the Framework for Horizontal Merger Assessment

Abstract This article discusses the assessment of horizontal mergers and harm to innovation when there is innovation competition. The goal is to establish a methodology for selecting the appropriate analytical framework for each situation, outlining mechanisms for recognizing innovation competition, defining relevant markets, evaluating the competitive significance of firms, identifying suitable theories of harm, and gathering pertinent evidence for each scenario. We review the literature on Competition Policy and on Economics of Innovation and take examples from the US and European case law. We also briefly discuss the strategic management literature to provide insights for the assessment. Considering post-merger reductions on innovation incentives as harm to innovation, we find differences of traditional merger procedure adequacy and challenges to build evidence, considering three faces of innovation, including possible combinations of these faces within a same merger case: (i) continuous innovation efforts in the product market, (ii) ongoing innovation efforts for developing new products, and (iii) future innovation efforts. In instances where the conventional approach to mergers falls short, exploring a capabilities-based assessment is recommended. Given the gaps found in the existing literature, we provide insights to the analysis as steps towards an agenda of capabilities-based merger assessment.