Economic Report President

company Roche Holdings, Ltd. Some of the issues raised in that casewere traditional questions about reduction of competition: for example,Roche was on the verge of becoming a major challenger to Genentech’sdominant position in the market for products to treat human growthhormone deficiency. But more central to the Commission’s complaintwas that Roche and Genentech were actual—not just potential—competitors in the development of some other important therapeuticinnovations, especially for the treatment of AIDS and HIV infection.Concerns about dynamic effects on the market and on the pace ofinnovation, not about short-term price or output levels, drove theenforcement decision.The Justice Department’s Antitrust Division first challenged a mergeron innovation grounds in 1993, when it investigated the proposedacquisition of General Motors’ Allison Transmission Division by ZFFriedrichshafen, a German company. Allison and ZF together produced85 percent of world output of heavy-duty automatic transmissionsfor trucks and buses, but they actually competed head to head inonly a few geographic markets. The Justice Department nonethelessconcluded that even markets whose concentration would be unaffectedby the merger would be harmed by the combined company’s reducedincentive to develop new designs and products, and it therefore movedto block the transaction.These two cases differ in important ways, and each establishes asignificant precedent for factoring innovation effects into competitionpolicy. In reaching its decision to challenge Roche’s acquisition ofGenentech, the FTC did not have to predict that the resultingincreased concentration in the biotechnology industry would reduceinnovation. Rather, the increase in concentration was accompaniedby concrete evidence that Roche was at an advanced stage in developinga competing human growth hormone treatment, and that Rocheand Genentech were among a small group of companies racingto develop certain AIDS/HIV treatments. The merger would thushave concentrated actual, not merely potential or speculative,R&D efforts.The Justice Department’s action in the ZF/Allison case was in onerespect bolder. There was no specific R&D effort that the AntitrustDivision found would be compromised by the acquisition. But the decisionindicates that where the consolidation is so great as to leave anindustry near monopoly and without other potential sources of newdevelopments, potential harm to the “innovation market” could justifychallenging the transaction. These two factors—very high levels of concentrationand evidence of parallel and competing innovation efforts—have also formed the basis for several recent actions through which therelationship between antitrust and innovation has further developed.178