Innovation Consolidation

Abstract

One of the most striking and undertheorized aspects of fields that commercialize patented technologies is the dynamic interplay of structural forces pushing toward consolidation. Of course, technological industries are complex ecosystems featuring numerous players of different sizes along the value chain spanning “upstream” research and development and “downstream” commercialization. However, when focusing on downstream industry segments that bring patented technologies to market—“innovation” in an economic sense—a relatively small number of large companies frequently play outsize roles. Technological industries tend to be patent-intensive, and legal and economic theory has long explored the role of patents in shaping industry structure—the number, size, and character of firms in an industry. However, such theory only explains one facet of industry structure. This Article provides a more holistic account of the forces shaping the commercialization of patented technologies by examining three industries: biopharmaceuticals; agricultural biotechnology, seeds, and agrochemicals; and software.

This Article argues that the commercialization of patented technologies is subject to several “concentration drivers” pushing toward consolidation, including direct barriers to entry based on exclusive rights and cost, indirect barriers to entry based on efficiencies of size, and significant merger and acquisition activity. It also argues that several common “fragmentation drivers” push in the opposite direction to increase the number of participants in these industries, including technology-based entry, voluntary divestures, and antitrust enforcement. While such forces are significant, the formidable strength of concentration drivers results in substantial consolidation in the commercialization of drugs, genetically modified seeds, and software. Turning to normative analysis, this Article argues that such consolidation can be salutary to a point but that undue concentration ultimately harms innovation, efficiency, consumer welfare, and democratic representation. It argues that patent law should more fully consider the myriad forces beyond exclusive rights that shape technological commercialization, and it provides prescriptions for enhancing industry entry through private ordering, federal innovation policy, and antitrust enforcement.

Keywords: Patents, intellectual property, industry structure, theory of the firm, antitrust, biopharmaceuticals, biotechnology, agricultural biotechnology, genetically modified seeds, software, industry concentration, vertical integration.

JEL Classification: L1, L10, L12, L13, L16, L22, L40, L41, L42, L5, K21, O3, O30, O31, O32, O33, O34, O38