How Antitrust Enforcement Can Spur Innovation: Bell Labs and the 1956 Consent Decree

Historical natural experiments: bridging economics and economic history

“…On the one hand, intellectual property rights can encourage creative activity (Giorcelli and Moser, 2019); on the other hand, intellectual property rights can limit follow-on innovation (Moser and Voena, 2012), as well as scientific output (Moser and Biasi, 2019). Watzinger et al (2019) show that in 1956, when the antitrust authorities forced Bell to license all its existing patents royalty-free, this had a positive effect on innovation, but only in sectors where Bell did not maintain a monopolistic position. Hanlon (2015) provides an empirical test of one of the most influential theories of technical change: technology should be developed endogenously to complement abundant inputs (as argued in the work of Hicks, 1932, andHabbakuk, 1962, and more recently by Acemoglu, 2002).…”

The Changing Structure of American Innovation: Some Cautionary Remarks for Economic Growth

“…Antitrust policy not only encouraged large firms to invest in internal R&D, but also occasionally promoted technology diffusion. A leading example is the 1956 consent decree against the Bell System, one of the most significant antitrust rulings in U.S. history (Watzinger et al, 2017). The decree forced Bell to license all its existing patents royalty-free to all American firms.…”

“…Compulsory licensing substantially increased follow-on innovation building on Bell patents. Using patent citations, Watzinger et al (2017) estimate an average increase in follow-on innovation of 14 percent. This effect was highly heterogeneous.…”

“…The increase in follow-on innovation was driven by young and small companies, and more than compensated Bell's reduced incentives to innovate. In an in-depth case study, Watzinger et States" (Grindley and Teece (1997) as quoted in Watzinger et al (2017)).…”

“…As Gordon Moore, the cofounder of Intel, notes: "[o]ne of the most important developments for the commercial semiconductor industry (...) was the antitrust suit filed against [the Bell System] in 1949 (...) which allowed the merchant semiconductor industry "to really get started" in the United States (...)[T]here is a direct connection between the liberal licensing policies of Bell Labs and people such as Gordon Teal leaving Bell Labs to start Texas Instruments and William Shockley doing the same thing to start, with the support of Beckman Instruments, Shockley Semiconductor in Palo Alto. This (...) started the growth of Silicon Valley"(Wessner (2001, p.86) as quoted inWatzinger et al (2017)). Scholars such asPeter Grindley and David Teece concur: "[AT&T's licensing policy shaped by antitrust policy] remains one of the most unheralded contributions to economic development possibly far exceeding the Marshall plan in terms of wealth generation it established abroad and in the United…”