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Towards dynamic efficiency: innovation and its implications for antitrust

Melissa A. Schilling, Antitrust Bulletin. 60.3, p. 191, Fall 2015

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There is growing consensus that the goal of antitrust enforcement should be to manage for dynamic efficiency, that is, an appropriate balance between short-run static efficiencies such as reducing costs and maximizing consumer surplus, and the longer-term gains that arise from innovation. However, determining how to incorporate innovation into efficiency goals is complicated; innovation typically entails great uncertainty, long time horizons, and interdependencies across projects. This means there are no easy solutions for estimating the welfare impact of any given innovation investment or strategy. We can, however, use what we know about how firms manage the innovation process, including how they choose and value projects and ration their capital to meet their short- and long-term needs, to gain insight into how we can best foster firms’ incentives to innovate in ways that improve long-run economic welfare. I provide some illustrative examples for how these insights can be incorporated into antitrust enforcement.

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