How US Antitrust Enforcement In opposition to Xerox Promoted Innovation by Japanese Rivals

Xerox invented trendy copier know-how and was so profitable that its model title grew to become a verb. In 1972, U.S. antitrust authorities charged Xerox with monopolization and ultimately ordered the licensing of all its copier-related patents. As new analysis by Robin Mamrak exhibits, this antitrust intervention promoted subsequent innovation within the copier business, however solely amongst Japanese opponents. However, their improvements benefited U.S. customers.

Competitors authorities in lots of international locations have tightened their antitrust coverage in recent times. In the US, this has raised considerations that stricter antitrust enforcement in opposition to home incumbents might undermine the pioneering function of American firms within the high-tech sector, as it might notably permit overseas opponents to catch up. For instance, a remark in The Wall Avenue Journal warned that “[a]ntitrust motion in opposition to main U.S. tech firms would shrink American dominance of the world’s fastest-growing business.” Equally, Large Tech executives have argued that antitrust prices in opposition to their firms would solely assist China.

In a current working paper, I current empirical proof on the influence of antitrust enforcement on (overseas) innovation by analyzing the Xerox case within the Seventies. The outcomes present that U.S. antitrust motion in opposition to Xerox promoted innovation within the goal business, however solely amongst Japanese opponents.

Xerox Company was the de facto monopolist within the U.S. marketplace for plain-paper copiers all through the Nineteen Sixties. As a little-known firm, Xerox achieved its breakthrough in 1959 when it launched the Xerox 914 workplace copier. The totally automated machine commercialized a novel copier know-how referred to as “xerography” that’s nonetheless extensively used immediately. Xerox’s know-how was superior to that of opponents, because it might produce dry copies inside seconds, was straightforward to function, and may very well be used with peculiar plain paper. Xerox had protected its copier know-how by greater than 2,000 patents and strictly refused to grant licenses to another producers of plain-paper copiers. Xerox additionally used patent infringement fits to dam entry by opponents who developed their very own patented applied sciences. For instance, when IBM launched its first plain-paper copier in 1970, Xerox instantly sued for patent infringement, initiating a authorized battle that lasted for a number of years.

In 1972, the Federal Commerce Fee (FTC) filed an antitrust criticism in opposition to Xerox that alleged monopolization of the copier market. At the moment, Xerox’s share within the quickly rising market was near 95%. Xerox was accused of hindering efficient competitors in plain-paper copiers by its strategic use of the patent system and anticompetitive pricing insurance policies. In 1975, Xerox settled with the FTC by signing a consent decree. As the important thing treatment, Xerox was ordered to license all its home and overseas copier-related patents to any third events. Xerox needed to grant the primary three licenses to every agency royalty-free and will then ask for cheap royalties that had been to not exceed 1.5% of the licensee’s revenues.

To research the influence of the Xerox case on subsequent innovation, I take a look at the variety of patents filed within the U.S. by corporations apart from Xerox or its subsidiaries. All patent functions are assigned to a know-how class. This enables me to match patenting in fields the place Xerox patents grew to become obtainable for licensing (= handled) to patenting in fields the place no Xerox patents had been licensable (= management). Put otherwise, handled applied sciences seize copier-related know-how courses that had been affected by antitrust motion in opposition to Xerox, whereas management applied sciences courses don’t. The determine beneath exhibits the typical annual variety of U.S., patent functions by Xerox’s opponents per know-how class in these two teams, relative to 1975.

Because the determine reveals, there was a relative improve in U.S. patenting in copier-related applied sciences after the settlement of the antitrust case. The corresponding regression estimates point out that antitrust enforcement in opposition to Xerox led to an extra 160 patent functions within the U.S. per 12 months after 1975. This represents an economically significant improve in patenting in copier-related applied sciences by round 1.4%. Thus, obligatory licensing of Xerox’s patents promoted innovation by different corporations within the copier business, as Xerox’s opponents used the newly obtainable know-how for follow-on analysis and both instantly or not directly constructed on Xerox’s patents. In distinction, as my analysis additional exhibits, Xerox itself solely modestly diminished its patenting after 1975. In abstract, the empirical outcomes point out that the general influence of the antitrust case on subsequent innovation was constructive.

Apparently, the principle beneficiaries of entry to Xerox’s know-how had been opponents from Japan. When separating the variety of patent functions by applicant nation, I discover no impact of the antitrust case on patenting by U.S. corporations. As a substitute, the rise in copier-related patenting after 1975 is primarily pushed by Japanese candidates. Amongst them, solely established corporations however not start-ups elevated their patenting. Furthermore, the constructive innovation impact was most pronounced for Japanese corporations with in depth prior patenting expertise in copier applied sciences. This means that potential opponents from Japan had been most profitable in constructing on Xerox’s know-how.

The discovering that Japanese rivals elevated their innovation following the antitrust case is consistent with historic narratives in regards to the growth of the copier business. Costs fell quickly as an increasing number of corporations entered the plain-paper copier market. Among the many entrants, American copier producers corresponding to IBM or Kodak began competing with Xerox within the high-volume market section the place Xerox made most of its gross sales. For IBM, getting into the high-volume section could also be defined by the potential to use economies of scale from the corporate’s current distribution community for mainframe computer systems.

Conversely, Japanese entrants corresponding to Canon, Konica, Minolta, Ricoh, and Sharp strategically targeted on the decrease finish of the copier market. They produced machines that had been cheaper, smaller, and designed for decrease volumes than current plain-paper copiers. This enterprise mannequin was completely different from that of most American copier producers and is taken into account one of many key causes for the Japanese success. In line with this narrative, I present that Japanese opponents filed a better share of patents that contained phrases of their title or summary that may be related to smaller copiers. Furthermore, their innovation exercise expanded to new know-how fields, whereas there was no discount within the high quality of innovations. Thus, antitrust motion in opposition to Xerox not solely affected the speed but additionally the path of subsequent innovation.

What can we study from these findings relating to immediately’s considerations that stricter antitrust enforcement might undermine the American dominance of the high-tech sector? The proof from my paper exhibits that such considerations are value investigating. Within the case of Xerox, U.S. antitrust intervention primarily helped overseas opponents to construct on Xerox’s know-how. Nevertheless, this end result isn’t as a consequence of a number of the opponents being Japanese. As a substitute, Japanese entrants employed a distinct enterprise mannequin that allowed them to develop the marketplace for plain-paper copiers to the lower-volume section, which had been ignored by Xerox. This implies that society lacked some improvements throughout Xerox’s patent-protected monopoly. In that approach, the antitrust case in opposition to Xerox additionally introduced monumental advantages to American customers. They skilled decrease costs and extra modern copiers, no matter whether or not the innovators had been Japanese.

Articles signify the opinions of their writers, not essentially these of the College of Chicago, the Sales space College of Enterprise, or its school.