Innovation in EU competition law : The resource-based view and disruption

Abstract

Innovation has so far been handled by competition law according to market structure, that is, by assuming that market power also allows undertakings to evade the competitive pressures that spur innovation. This structural approach has fitted innovation into a tried-and-tested analytical and normative framework. Its limits have nonetheless become apparent as competition law is increasingly hemmed in by a static outlook and is called on to apply no harm to innovation unrelated to market power. As such, this paper proposes complementing a structural approach with two advances from strategic management studies. The first advance is the ‘resource-based view’, which connects competitive advantage with firm heterogeneity. Since undertakings do not have the same capabilities, the exit of innovators from the market might not be compensated for by the entry of equally innovating undertakings even if barriers to entry are low. Harm to innovation is thus centred on assets granting ‘innovation capabilities’, such as intellectual property or pipeline products. Cases of abusive refusal to license and mergers of parallel research show that rival claims over these assets are to be resolved based on differences in those innovation capabilities. The second advance is the theory of disruptive innovation, which explains major changes in consumer preferences and production methods. Strategic management has established that an inefficient start is an integral part of disruption, allowing disruptors to be ignored until their productive efficiency increases enough to shift the market. This contrasts with the notion of competition on the merits allowing the exclusion of less efficient competitors. Competition law must therefore adapt to strategies which do not show an effect on market structure, notably the higher prices of market power, but which are aimed at preventing disruptive innovation from occurring.