firms like Wal-Mart and (until recently) Toyota been mirrored here? Put another way, where is
the new firm that could transform healthcare like Amazon did book selling or Expedia travel?
Cutler argues that there are two fundamental barriers that have deterred entrepreneurs who might
transform the health care system. First, there is a lack of good information on quality.
Thus, the gains that a truly innovative entity which developed a superior product could enjoy are
very limited. Second, the way in which public insurance plans reward doctors and hospitals is
very troubled. In most industries, higher quality is associated with higher prices. That is not true
in medical care, largely because the largest buyer of health care services by far, the federal
government, pays on the basis of volume, not value. As a result, inefficient care is the natural
outcome. The essay discusses how the recent reform legislation dealt with these issues and other
approaches to addressing them.
Suzanne Scotchmer focuses on the energy sector, and in particular, the challenge of encouraging
the development of new technologies that can reduce carbon emissions that may lead to global
warning. A wide variety of mechanisms have been proposed to discourage carbon emissions,
with much attention being devoted to concept of a “cap”—the issuance of a fixed number
tradable allowances that give firms the right to emit a certain amount of carbon—and the
imposition of a tax on carbon emissions. This paper explores on what these mechanisms for
innovation are.
Scotchmer points out that there are really two goals behind these policies. Regardless of which
type of regulation is chosen, such as an emissions tax or a carbon cap, the policy must perform
two tasks. One task is to encourage innovation: the development of future generations of
technologies. In the short run, however, regulators must ensure that efficient choices regarding
the energy which is consumed today: energy should be produced at the lowest cost (taking into
account the price that the user pays and the broader impacts on society). Moreover, the price of
energy should be equal to the (marginal) cost of producing it, again considering the broader
impact on society.
The paper argues that the effects of a cap-and-trade system and a carbon tax are not the same. If
demand for energy is relatively fixed (i.e., not price sensitive), a carbon tax will create greater
incentives for firms to innovate. In particular, if a new, more efficient technology is invented
under a cap-and-trade system, an excess supply of allowances can result. The price of allowances
falls, leading to more production of energy at a lower price. As a result, the fall in the price of
allowances reduces power generators' willingness to adopt the new innovation. (Indeed, the
inventor may not even wish to make the new technology widely available in order to keep up
prices.) As a result, the new technology may not be broadly adopted, leading to an inefficient
outcome. In many cases, a carbon tax willl generate more incentives to innovate.
In the third essay, Joshua Gans reconsiders the relationship between antitrust and innovation.
Building on earlier research published in the Innovation Policy and the Economy series (Evans
and Schmalensee, 2002; Katz and Shelanski, 2005; Gilbert, 2006), Gans focuses on the antitrust
policy in markets where competition is not “in the market” but “for the market.” When a single
firm can dominate a market at a point in time (but may be displaced by entrant innovators over
time), it is important to consider the dynamic consequences of antitrust policy: a policy which