Regulation and Innovation: Approaching Market Failure from Both Sides

Abstract

Regulation is often claimed to be the enemy of socially desirable in-novation because of factors including innovation’s unpredictability and regulation’s compliance costs. In this essay, we bring two intellectual property scholars’ perspectives to bear on the question of regulation’s impact on innovation. We offer a novel, yet intuitive, analytical frame-work that takes both market demand failures, and failures of supplier appropriability into account. Traditionally, regulation seeks to mitigate market failures that create deviations between the demand portfolio perceived by suppliers and the socially optimal demand portfolio. Studies of the interplay between regulation and innovation have mostly taken this perspective, considering the impact of various regulatory transaction and compliance costs on innovation. Intellectual property law and competition law target a different sort of problem, where markets fail to supply products and services at competitive prices or to undertake innovative activities because of supplier appropriability issues.