Economic Report President

R&D dollar than do large firms. But these results do not necessarilyimply that large firms are less desirable from an innovation standpoint.First, not all patents are equivalent in value, and not all successfulR&D is patented. So simply counting patents is an imperfectmeasure of innovative productivity.Second, there may be diminishing returns to R&D. Big firms, becauseof their greater resources and ability to diversify, may simply be morewilling to risk investing in projects that appear to have less prospect ofsuccess. Some of these projects do succeed, making discoveries thatsmaller firms might have missed.Finally, large firms may earn higher returns on their R&D thansmall ones because they can deploy innovations across a broader arrayof products, or take advantage of process cost savings over a larger productionvolume. This may explain why large firms continue to invest inR&D even after their proportionate patent yield drops below that ofsmaller firms.In short, although available data and research do call into questionthe conjecture that large firms are superior innovators, they do notnecessarily support the contrary view that large firms are bad for technologicalprogress and economic growth. The evidence suggests thatthe large firms created by some recent mergers will have no specialtendency—but likewise no special reluctance—to engage in innovation.MARKET CONCENTRATION, COMPETITION, ANDINNOVATIONThe focus on market share in U.S. competition policy fits logicallywith antitrust’s basic premise that economic performance improveswith competition. Of course, exception is made for industries that arenatural monopolies, in which costs per unit of output decline as a firm’sproduction increases, to the point that it is most efficient to have justone firm produce all output. In such markets, which historically haveincluded railroads, electric power, and telecommunications, monopolymay actually be better for consumers, so long as the monopolist can beprevented from abusing its power to raise prices or stifle innovation bypotential competitors. Competition in such cases would require wastefulduplication of facilities—parallel sets of railroad tracks, or duplicatesets of wires connecting houses to the electric power grid or thetelephone network. For this reason natural monopolies have generallybeen allowed to operate but subjected to strict regulation. In mostindustries, however, economic theory and antitrust policy have longseen more rather than less competition as best serving the purpose oflowering prices, expanding output, and making consumers better off.The presumption in favor of greater competition becomes lessuniversal when the policy goal is not just lower prices for a given set ofgoods produced under a fixed set of technologies, but also the preservationof efficient innovative activity by firms over time. As a theoretical175