By Lisanne Hummel*
Introduction
Europe’s capacity for innovation has come under intense scrutiny in recent years, recently fueled by reports from Draghi and Letta that highlight a widening innovation gap between Europe, China, and the U.S. With escalating geopolitical tensions and the increasing urgency for Europe to maintain independent competitiveness in especially digital markets, the mission letters to incoming Commissioners underscore the vital role of disruptive innovation. These letters establish Europe’s competitiveness as intrinsically linked to its ability to prioritize groundbreaking innovations.
Competition law plays an important role in safeguarding innovation. By protecting the competitive process, ultimately an environment is created that is conducive to innovation. However, the challenges are manifold. Innovation is inherently dynamic, multifaceted, and elusive—a concept difficult to fully grasp within the confines of competition law. Digital platforms further complicate these questions by using new types of processes to innovate. Key questions arise: How do competition and innovation relate to each other? How do innovation processes in digital markets work? How can innovation in digital markets best be protected through competition? While these questions are complex, resolving them is essential for understanding the role that competition law can play in protecting innovation.
In my dissertation, I explore the challenges of capturing innovation in digital markets within the framework of EU competition law, particularly given the policy field’s current reliance on static efficiencies to establish harm to competition. I propose aligning competition law’s approach with broader perspectives derived from interdisciplinary economic theories to better understand and protect innovation. Specifically, and as I will focus on in this blog post, I find one compelling insight in evolutionary and complexity economics: diversity is fundamental to fostering innovation. To that end, I advocate for more economic research on the link between diversity and innovation, specifically in digital markets.
The Challenge of Capturing Innovation
The adoption of the “more economic approach” by the European Commission in the 2000s marked a shift in EU competition law. By transitioning from market structure-based reasoning to an effects-based framework focused on consumer welfare, the modernization of EU competition law with enforcement priorities began to take shape. This shift was long overdue, addressing inefficiencies and backlogs that had plagued earlier practices.
Under the more economic approach, the protection of competition was framed as a mechanism to enhance consumer welfare and ensure efficient resource allocation. However, this approach’s reliance on static efficiencies poses inherent challenges to the integration of innovation into enforcement practices. Static efficiencies primarily evaluate outcomes like output, price, and costs, based on the presumption that the technological means of production remain fixed. This means that the transformative potential of innovation is overlooked. As a consequence, in competition law, protecting innovation seems to become a byproduct of protecting competition.
The difficulties in capturing innovation within this static framework are compounded by ongoing shifts in doctrine and in enforcement. There is a widespread debate on the (societal) goals of EU competition law. Although protecting innovation is a generally accepted goal of EU competition law, this ‘goals-debate’ also leads to the question as to whether all innovation should be equally protected. In terms of enforcement, the Commission has made great strides in better capturing how innovation works in pharmaceutical markets, such as in the Dow/Dupont-case. However, despite these evolving perspectives, innovation in digital markets remains a complex concept to address using traditional competition law methodologies. Simply said, innovation in pharmaceutical markets develops in a more linear fashion, whereas in digital markets (software) innovation follows a more iterative process with quick feedback loops to the market. The current approaches in EU competition law seem to be unable to capture these more iterative and uncertain processes.
This inability to capture innovation underscores the urgent need for fresh approaches and conceptual frameworks—ones capable of enabling competition authorities not only to understand how innovation works but also help them focus on protecting innovation.
Reimagining Innovation in Competition Law Enforcement
In my dissertation I examined theories that might better conceptualize how innovation works and how competition and innovation relate to each other. One common and critical takeaway from those theories is this: when a market shows diversity, it seems that it is more likely for innovation to emerge in that market.
To explain: evolutionary and complexity economics compare markets to ecological systems: a desert is a non-diverse system, where new life forms are unlikely to be created. However, in diverse ecosystems such as rainforests, the chance of a new life form is significantly higher. Hence, for Europe to reclaim its innovative edge, it might be useful if markets embrace diversity.
However, this link between diversity and innovation is difficult to establish and requires more specific economic research. Questions arise, such as what types of diversity most effectively drive innovation? Diversity can be found in many different aspects in markets. For example, markets can be diverse in terms of number and type of undertakings: small and large firms, specialized and generic firms, and so on. There can also be a diverse type of resources and capabilities present in a market, such as the knowledge, data and data capabilities of firms but also the expertise of workers and possibilities for funding. A diversity in resources leads to different ‘paths’ to innovation, where a diversity of research paths in itself might positively link to innovation in a market. All these different types of diversity can exist on at least two levels: (1) there needs to be diversity within firms and (2) there needs to be diversity in markets in a broader sense. The link between these types of diversity and the level of innovation requires more economic research.
There is also limited empirical evidence clarifying what the “ideal” level of diversity might be. For example, is it necessary to have 20 firms in a market for innovation to be fostered, or are 10 firms enough? Further economic research is essential to obtain this empirical evidence. However, it seems plausible that these ideal levels also depend on the type of market in question. Therefore, market investigations into specific (digital) markets can also be useful. In this way, competition authorities can also play a role in clarifying the answers to these questions.
So, when it is clear how diversity links to innovation, what does this mean for competition law? Protecting diversity as a way to protect innovation could translate into a theory on how innovation is harmed by dominant companies in abuse of dominance cases and by mergers and acquisitions in merger control cases. For example, when a dominant undertaking, with its conduct, aims to reduce diversity in a market, this could potentially be a reason for a competition authority to intervene. In merger control this idea might mean that a merger or acquisition might endanger the level of diversity in the market and should therefore be prohibited. However, I want to reiterate here that for diversity to be a useful indicator for innovation, more research is needed.
Conclusion
Innovation is increasingly recognized as pivotal to Europe’s competitiveness in the global landscape, but its dynamic nature poses unique challenges for competition authorities tasked with its protection. Addressing these challenges calls for a bold shift in perspective—one that embraces interdisciplinary insights and prioritizes research on innovation.
Diversity as a way to protect innovation follows from some of these interdisciplinary insights. However, there is still a lack of economic research into the link between competition, diversity and innovation. Therefore, I would like to invite economic scholars to perform more research into this link between diversity and innovation. As I suspect that the required diversity for innovation will differ per market, also specific market investigations are required. This is where competition authorities can play a role, by looking at such markets, and how the level of diversity in resources, capabilities, research paths and undertakings impact innovation. I would argue that better understanding of innovation leads to better protecting innovation and, ultimately, to a more innovative Europe.
* This blog post builds on the dissertation by L.M.F. Hummel, “Innovation as a Counterpower in Digital Markets: Rethinking EU Competition Law”, which was supported by the European Research Council (ERC) Starting Grant (Number: 852005), awarded to Professor dr. A. Gerbrandy. Lisanne currently works at the legal affairs directorate of the Dutch Authority for Consumers and Markets. She wrote this blog in her personal capacity.
Dr. Lisanne Hummel is legal counsel at the Dutch Competition and Markets Authority (ACM)
