2008 Compass Lexecon Prize Winners Announced

The Compass Lexecon Prize Selection Committee is pleased to announce the winner of the second annual Compass Lexecon Prize. The Compass Lexecon Prize is awarded to a published or forthcoming paper in a peer-reviewed journal that, in the opinion of the Selection Committee, makes the most significant contribution to the understanding and implementation of competition policy. The 2008 winner, whose authors will share $10,000, is:

Ilya Segal of Stanford University and Michael Whinston of Northwestern University, for their paper, published in the American Economic Review, entitled “Antitrust in Innovative Industries”

“Antitrust in Innovative Industries,” by Ilya Segal and Michael Whinston, is a seminal paper that provides, for the first time, an analytic framework for studying the static and dynamic impacts of antitrust policy towards innovative industries in an integrated fashion. The framework developed by Segal and Whinston fosters coherent approaches to the age-old and much debated question whether competitive concerns about static efficiency should give way to the perceived needs of dynamic entry and investment. The authors introduce elegant representations of antitrust policy into growth models where successful entrants become continuing incumbents that must in turn grapple with new generations of innovative entrants. Here, the effects of antitrust policy on innovation incentives result from the policy’s net impact on an innovators profits both when it is a new entrant and when it is subsequently an incumbent.

One of the key insights is that antitrust policies that protectively restrict incumbents behavior toward new entrants may have conflicting or paradoxical effects on innovation incentives because the immediate benefit to an entrant will be offset or overcome by the decrease in that same firms profits when it becomes an incumbent itself subject to the restrictions on its conduct. Nevertheless, the paper identifies abstract circumstances in which antitrust policies that limit R&D-deterring activities, the duration of exclusive contracts, or system incompatibilities on net do increase the pace of innovation. Here, because antitrust limits entry-deterring sacrifices in incumbent profits, the restrictions increase both entrant and incumbent returns, holding the rate of innovation fixed, which Segal and Whinston show suffices to assure enhanced incentives for innovation in the comparison between the two resulting stationary Markov perfect equilibria.

The contribution of Segal and Whinston that is most significant here is showing the way for integrated treatments of static and dynamic impacts of antitrust policy. The paper is likely to stimulate and inspire a spate of new research that will bring Segal and Whinstons illuminating perspectives even further into the beneficial implementation of competition policy.

Compass Lexecon Prize Selection Committee

Jonathan B. Baker
American University & CRA International

Dennis W. Carlton
University of Chicago & Compass Lexecon

Kenneth G. Elzinga
University of Virginia

Richard J. Gilbert
University of California, Berkeley & Compass Lexecon

Joseph P. Kalt
Harvard University & Compass Lexecon

Michael L. Katz
New York University & University of California, Berkeley

Janusz A. Ordover
New York University & Compass Lexecon

Robert H. Porter
Northwestern University

Daniel L. Rubinfeld
University of California, Berkeley & Compass Lexecon

Greg Shaffer
University of Rochester

Joseph E. Stiglitz
Columbia University

Robert D. Willig
Princeton University & Compass Lexecon