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

Abstract

Is compulsory licensing an effective antitrust remedy to increase innovation? To answer this question, we analyze the 1956 consent decree that settled an antitrust lawsuit against Bell, a vertically integrated monopolist charged with foreclosing the telecommunications equipment market. Bell was forced to license all its existing patents royalty-free, including those not related to telecommunications. We identify the effect of the consent decree on follow-on innovations building on Bell patents by using exactly matched non-Bell patents as control group. We show that the consent decree led to a lasting increase in innovation but only in markets outside the telecommunications sector. (JEL D45, K21, L12, L24, L63, O31, O34)

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

“…The increase in follow-on innovation was driven by young and small companies and more than compensated for Bell's reduced incentives to innovate. In an in-depth case study, Watzinger et al (2017) demonstrate that the decree accelerated the diffusion of transistor technology, one of the most important technologies of the twentieth century.…”

“…During this period, if large firms wanted to grow, they often had little choice but to invest in internal R&D. 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 US history (Watzinger et al 2017). The decree forced Bell to license all its existing patents royalty-free to all American firms.…”

“…18 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% with an effect that was highly heterogeneous. In the telecommunications sector, where Bell kept using exclusionary practices, there was no significant increase.…”

“…This view that the consent decree was decisive for US post-World War II innovation, particularly by spurring the creation of whole industries, is shared by many observers. As Gordon Moore, the cofounder of Intel, notes: Scholars such as Peter Grindley and David Teece (1997, 258) 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 States" (as quoted in Watzinger et al 2017).…”

Visibility of Technology and Cumulative Innovation: Evidence from Trade Secrets Laws

“…Gaessler et al (2018) find an increase of 20% using data for European patents. Related results on the effect of patents rights on follow-on innovation from historical episodes of compulsory licensing can be found in Moser and Voena (2012) and Watzinger et al (2019).…”