Effect of antitrust on innovative development with a different degree of intellectual property protection

Abstract

Intellectual property is often referred to as a “legal monopoly”, which should stimulate the innovative activity of authors and inventors. In this formulation, increased antitrust regulation should always have a negative effect on the innovation industry, since it is aimed at reducing the companies’ profits, and therefore, other things being equal, reducing the innovation incentives. The paper reveals the conditions under which this statement can be true, and under which, on the contrary, the strengthening of antimonopoly regulation leads to an increase in innovative output. Using cross-country data, an empirical assessment of the mutual influence of the effectiveness of antimonopoly regulation and the degree of protection of intellectual property rights on the efficiency of the innovation sector and the economy are obtained. As an indicator of relative efficiency the paper considers the proximity to the production possibilities frontier, determined by the stochastic frontier analysis (SFA) method. As a result, the hypothesis for the complementary nature of the influence of both policies is confirmed: the strengthening of one gives a positive result only when the other is strong. The complementary nature of policies can be related to the following aspects. In the context of weak IP right protection, right holders are extensively using alternative mechanisms for the specification of property rights, which includes business practices that are controversial from the antitrust point of view. In such a case, strengthening the severity of antimonopoly regulation increases the costs of such practices and ultimately reduces the effectiveness of the intellectual property protection reducing output in the innovation industry. This result justifies the existence of exceptions for the IP owners, which could be present in the antimonopoly legislation in countries with a low level of IP rights protection. But as the effectiveness of the IP rights protection becomes stronger, such exceptions can be canceled. This result also shows that the notion of IP as a “legal monopoly” is overly simplistic and can lead to risks of Type I enforcement errors (punishing the innocent).