EU competition policy may constitute an “obstacle” to innovation and growth in the high-tech sector, writes Simon Tilford, chief economist at the Centre for European Reform (CER), in a November paper.
High-tech firms often create whole new markets for products, which they “inevitably dominate, at least until a rival company comes along and challenges them,” states Tilford. It is this temporary market power and the associated profit, he argues, that “justify heavy investment in research and development”.
Despite conceding that the European Commission accepts that in certain circumstances, “mergers can be good for competition,” the author believes its approach has “not really evolved in its treatment of dominant firms”.
Under the Commission’s approach, the author says high-tech firms are either “forced to share their intellectual property with competitors, or prevented from controlling the price at which their products and services are sold”. As a result, “they innovate less,” Tilford contends.
In fact, the author suggests that EU competition policy may be “less favourable to competition than its advocates believe”. In his view, the EU executive needs to recognise the role of “temporary market power as a driver of innovation”.
Indeed, “many high-tech companies cannot help but have a dominant market position because they have often created whole new markets for a product they have developed,” Tilford argues. But market leadership in high-tech sectors tends to be “short-lived,” he maintains, because a “new product from a rival firm can very quickly make the dominant technology redundant”. Thus, the opportunity to charge high prices for a while at least is often “what drives companies in these sectors to innovate,” the author argues.
For this reason, Tilford believes that the Commission’s requirement to share intellectual property with competitors “threatens to weaken competition, not strengthen it”. The EU executive needs to recognise that temporary monopoly positions in high-tech businesses are often inevitable, he argues, adding that “taking action against dominant high-tech firms can do more harm than good”.
Tilford concludes that if the rules are not clear, or the nature of competition is misunderstood, then “innovation will suffer”.