INNOVATION AND THE LIMITS OFANTITRUST Geoffrey A. Manne  & Joshua D. Wright † ABSTRACT Frank Easterbrook’s seminal analysis of error-cost minimization in The Limits of Antitrust has special relevance to antitrust intervention in markets where innovation is a critical dimension of competition. Both product and business innovations involve novel practices. Historically, the economics profession has tended initially to rely upon monopoly explanations for such practices. Courts have reacted with similar hostility. But almost always there has followed a more nuanced economic understanding of the business practice that recognized its procompetitive virtues. Antitrust standards have adjusted occasionally to reflect that new economic learning. This sequence has produced a fundamental link between innovation and antitrust error that transcends the uncontroversial point that the probability of false positives and their social costs are both higher in the case of innovation and innovative business practices. We discuss some principles for applying Easterbrook’s error-cost framework to innovation. We then discuss the historical relationship between antitrust error and inno- vation. We conclude by challenging the conventional wisdom that the error- cost approach implies that the rule of reason, rather than per se rules, should apply to most forms of business conduct. We instead identify simple filters to harness existing economic knowledge to design simple rules that minimize error costs. We make five such proposals. JEL: B40; B41; K00; K21; L10; L12; L40; L41; L42; O38 I. INTRODUCTION In 1998, the Department of Justice and a number of states brought suit against Microsoft for various alleged violations of the antitrust laws involving the operating system and browser markets. 1 Even before that landmark anti- trust intervention into the operating system market, antitrust scholars, prac- titioners, and enforcers thoroughly debated the optimal design of competition policy and enforcement in innovative industries, what is often  International Center for Law and Economics, Lewis and Clark Law School, Portland, Oregon, USA. E-mail: gmanne@laweconcenter.org. † George Mason University School of Law and Department of Economics, International Center for Law and Economics, Arlington, Virginia, USA. E-mail: jwrightg@gmu.edu. We are grateful to the participants at the Searle Center on Law, Regulation, and Economic Growth Research Roundtable on The Limits of Antitrust Revisited for helpful comments. We thank Jan Rybnicek and Judd Stone for superb research assistance. All errors are our own. 1 See generally WILLIAM H. PAGE &JOHN E. LOPATKA,THE MICROSOFT CASE: ANTITRUST , HIGH TECHNOLOGY , AND CONSUMER WELFARE (Chicago Press 2007). Journal of Competition Law & Economics, 6(1), 153–202 doi:10.1093/joclec/nhp032 # The Author (2010). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org by on March 18, 2010 http://jcle.oxfordjournals.org Downloaded from