in the direction of more technology based entry and more globalization mean we will have to learn how to make these enquiries.

#### 4. a.2) Other Horizontal Issues

Another set of horizontal issues that arise in innovation contexts are somewhat different from static contexts. In static contexts, competition policy tends to be suspicious of agreements among competitors. They may reduce competition. Indeed, agreements among competitors in general provide an opportunity to reduce competition, and the profit incentive to reduce competition is there.

In innovation contexts, certain agreements among competitors may be pro-competitive. For example, industry-wide standard setting for interface standards may increase competition on each side of the standard. It is important in such cases that the nature of the agreement not exclude new competition. It is also important that it not include disguised mechanisms for setting prices or quantities at the firm level. The real point, however, is that in certain technical innovation circumstances, competition policy authorities may have little choice other than tolerating some agreements among competitors, focusing attention on limiting the anticompetitive impact of those agreements rather than on trying to avoid them altogether.

One context in which it has been suggested that agreements between competitors can be pro-competitive is settlements of litigation. Competitors may be (notably in the litigious US) locked in litigation, only to settle the litigation by either (1) merging or (2) otherwise contracting to settle the litigation in ways that limit the degree to which one or both may compete.

One defense that is suggested for such settlements is that litigation is costly, and the agreements save resources in the courts. Competition policy authorities should view that argument with great skepticism. While it is true that saving the courts’ resources is a valuable social goal, there will be other ways to achieve those savings other than by letting one or both competitors determine one another’s prices, quantities, innovation, marketing mix, and so on. The settlement of the case should not come at the expense of consumers.

A special case – perhaps the only special case – in which that general argument does not apply is the settlement of patent litigation. In that case, it is conceivable that the settlement restricts competition no more than the outcome of the litigation would have. Consider the case where patents held by one of the firms would have permitted it to exclude the other from production. Then a merger between the two may be a merger to monopoly, but it is a merger to legal, patent-protected monopoly. Of course, the settlement of the litigation makes it impossible to know whether the patent does permit the first firm to exclude the second. The issue was disputed in the litigation, but not resolved.

A particular form of these settlements has emerged in litigation between pharmaceutical firms in the US and so-called “generic” entrants. A generic entrant produces a copy of a drug, entering when the patent protection, if any, held by the pharmaceutical firm ends. A complex of special patent laws and drug regulations makes determining when the patent ends uncertain in many cases, and the degree to which drugs are protected by patents varies as well. Thus, there is sometimes patent litigation