Law plays an important role in the formation of incentives for the creation as well as the diffusion of intellectual property. Intellectual property laws and competition law are of special importance. Intellectual property laws determine when an inventor is entitled to receive an exclusive right to use his invention. The grant of such a right is often necessary in order to overcome the market failure problem associated with the publicgood nature of such rights. It thus strengthens economic incentives to innovate. Competition law ensures that competitors do not create artificial obstacles to competition, which is also an important catalizator for dynamic efficiency. Accordingly, the two legal systems have interwined effects on economic incentives to innovate. The balance between the two systems is of much importance in the information economy.
The first part of this paper suggests four guiding principles for regulating the interface between the two sets of legal rules, that should apply once the use of a legally granted intellectual property right raises a competitive concern. It then analyzes the existing legal rules, in light of the proposed principles, to determine whether the legal environment deters or facilitates innovation and its diffusion. As the paper shows, the Israeli Competition Act can be interpreted in a fashion that would align the law with the proposed principles. Moreover, most of the court decisions in this area exhibit a similar tendency, although none attempt to set out the guiding principles.
The second part of the paper analyzes the competition rules which regulate structural changes in the market which are aimed to create new intellectual property. It is argued that the small size of the Israeli market and the high level of innovativeness which characterizes many of its markets, as well as the fact that most innovation markets are international and that information is a strategic asset for succeeding in such markets, require us to change some of the common assumptions of competition law. Yet, as is shown, the legal rules that regulate mergers and joint ventures usually leave little room, if any, for dynamic efficiency considerations, and should thus be changed.
