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Complexity, diversity, and antitrust.

Article Excerpt
I. LIFE AND DEATH

This article discusses some ways in which complexity affects antitrust. It is broadly based on my lunchtime talk at the American Antitrust Institute's June 2005 Roundtable on that subject. My choice of topic was inspired by a competition issue of personal importance to me: innovation in food allergy medicine. Since I'm told my nut allergy could well be deadly, this is a life-or-death issue. (1)

The Wall Street Journal reports that a biotech company named Tanox had a promising experimental peanut allergy treatment, TNX-901, in trials five years ago, but Novartis and Genentech, Tanox's "corporate partners," insisted on its withdrawal. (2) The companies responded that they had "together strived to identify the most promising medicine" and picked Xolair, a Genentech drug already on the market for a different indication, as "the most promising project." (3) Of course the Journal didn't tell us all about the issue, but as a potential consumer I wondered: why not pursue both potentially life-saving treatments? Apparently Tanox thought it worth pursuing TNX-901 given the status of Xolair, which would be the normal market test if no "contract got in [the] way."

Isn't diversity of approach one of the benefits of competition? I'm thinking of complex instruction set versus reduced instruction set computers, of gas-guzzlers versus small cars in the 1970s, of advertising-supported versus subscription news media, of bundled pricing versus a la carte, of open-source versus closed-architecture software, of walled gardens versus a free-for-all web, of Wintel's modular design versus Apple's integration. I'm thinking of the many cases where nobody's judgments are very reliable, and there is real gain to diversification. How, if at all, should antitrust seek to protect such diversity against (let's assume) technical experts' best judgments about "the most promising project"? (4)

II. VARIETIES OF COMPETITIVE BENEFITS

To explore the role of complexity in antitrust, I start by unpacking somewhat the benefits of competition. Almost as shorthand, we often stress the competitive benefit that undergraduates learn in Econ 1: competition brings price to cost. But this isn't competition's only benefit and probably isn't the most important.

Firms, like other organizations, surely differ in their levels of efficiency, and competition helps assign most of the production to the most efficient organizations. This "selection effect" isn't quite my focus either, but it's closer: I want to focus on the competitive benefits of a kind of biodiversity.

How can we minimize the harm wrought by the foolishness that each of us so clearly detects in everybody else?...