William J. Baumol

When is inter-firm coordination beneficial? The case of innovation
JEL Classification: L1; L4
Keywords: inter-firm coordination; innovation; anti-competitive behavior

Abstract: We are used to the idea that collusion among firms is legitimately presumed to be damaging to the public interest, and that the antitrust authorities are fully justified in taking coordination of prices to merit prohibition per se as inexcusable in any circumstances. One reaches that conclusion when one thinks about price as the matter being decided upon and when the coordinating parties are horizontal competitors. But, as those who have studied the issue know, joint decisions can in some general cases materially promote the public interest if those decisions deal with matters other than price. Even coordination of prices can be desirable if the firms involved are vertically, rather than horizontally, related. Indeed, this is widely recognized by antitrust authorities, who, for example, take a more favorable view of vertical coordination than of horizontal coordination and have frequently avoided interference in research joint ventures. The central point of this paper is that, with important exceptions, coordination on innovation and on the supply of proprietary technical information to competitors can be highly beneficial to the economy, enhancing both its static efficiency and its growth. The policy implication is that regulatory agencies and the courts should exercise extreme restraint in interfering with such joint decision making, though they should maintain some degree of vigilance to ensure that is does not transform itself into anti-competitive behavior that profits at the consumer's expense.

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