Economic Report President

The antitrust authorities’ linking of competition to innovation in theLockheed/Northrop case was a cautious one. Two factors weighed heavilytoward blocking the transaction. First, there was evidence thatLockheed and Northrop either were actually conducting competingR&D on relevant products or were the leading contenders to conductsuch R&D in the future. Second, there was evidence that their consolidationwould lead to either monopoly or substantial dominance inrelevant product markets, not just reducing but in large part eliminatingcompetitive pressure. Thus, a combination of market structure andthe existence of parallel innovation efforts pointed toward a likelyreduction in innovative activity if the merger were consummated.Biotechnology and PharmaceuticalsThe FTC recently focused on innovation concerns in crafting a consentagreement with two merging firms in the biotechnology and pharmaceuticalsindustry. In 1996 Ciba-Geigy Ltd. and Sandoz Ltd., twoSwiss firms with substantial U.S. operations, announced plans tomerge into a new company, to be known as Novartis. The FTC raisedseveral objections to the merger. Some of the objections concerned traditionalantitrust matters: the FTC was concerned that the combinationwould give the merged entity power to reduce competition andraise prices in the market for herbicides used in growing corn and inthat for flea-control products for pets. The FTC accordingly orderedthat one party divest its businesses in those markets as a condition forits approval. The more novel parts of the Commission’s challenge,however, had to do with the prospects for innovation in the market forgene therapy products, which allow treatment of diseases and medicalconditions by modifying genes in patients’ cells.At the time of the FTC’s investigation, in 1996 and 1997, no genetherapy products were yet on the market; indeed, none had even beenapproved by the Food and Drug Administration. Conventionalantitrust analysis therefore did not apply, because there was no productmarket in which to analyze the merger’s effects on prices and output.The Commission instead adopted a dynamic perspective: lookingto the future, it found two reasons for long-run competitive concerns.First, the market for gene therapy products is expected to grow rapidly,with annual sales of $45 billion projected by 2010. Second, Ciba andSandoz were among a very few firms with the technological capabilityand rights to intellectual property necessary to develop gene therapyproducts commercially. Together they would control essential patents,know-how, and proprietary commercial rights without which otherfirms, even if they did eventually develop gene therapy products,would be unable to commercialize them.The FTC concluded that “preserving long-run innovation in thesecircumstances is critical.” The Commission did not, however, block themerger. Instead, it crafted a consent decree designed to correct those180