Sometimes legal protection from the government goes even farther and permits inventors in one of the complementary technologies to control technical progress in the other. This can arise because this the legal scope of the protection, or because that is its practical scope in the marketplace.

An especially problematic area is the control of interfaces between the GPT and the applications. For example, Microsoft exerts control over the interfaces between its Windows operating system and many complements, including PCs and applications software, and, now that networked computing is so important, servers. Microsoft routinely asserts the right to direct and control technical progress on the other side of the interface, that is, by its complementors. Competition policy authorities are entirely correct that that control is anti-innovation as well as anti-competition.

The granting of legal rights that let one complementor block innovation by another complementor is an example in which we should not think of the conflict between competition in the short run and innovation in the long run. This is, on its face, a conflict between innovation and innovation. It has implications for competition policy authorities when they seek to undertake pro-innovation competition policy.

The conflicts between the legal protections for complementors’ invention can be overcome by private contract in some circumstances. That is, even if the government has originally misallocated protection, contracts among the complementors can reallocate it to the efficient locations. There are three important limitations on this argument. The first is when the transactions costs of contracting are high, in the broad sense economists use that phrase. The second is when market power, or some other force, means contractual reallocation does not move the economy toward efficiency. (Providing the legal right to direct the innovative activities of other firms to a firm with market power is a recipe for trouble.) The third is when the legal protections are incomplete property rights. We shall return to the third point in a moment.

#### 4. b.3) Scope: Improvements

Economics has recently come to understand (thanks largely to the work of Suzanne Scotchmer) that this same analysis, based in complementarity, applies to earlier inventions and later improvements. Using an early invention and a later improvement together may make a better product than if they are used separately. Strengthening the formal legal protection for early inventors or creators does not necessarily increase the incentive for innovation overall. It increases the incentive for early inventors, but can decrease it for later ones. Similarly, legal rights for early inventors to control the inventive actions of later inventors can create a drag on innovation. An original inventor may, for example, seek to block an improvement by another firm, saying it violates the patent associated with the original invention. Of course, the full analysis of complementarity applies. Contracts among earlier and later inventors could overcome any problem of rights allocation (subject to the same three limitations as above.)

#### 4. b.4) Incomplete Property Rights

Legal scholars tend to label patents, copyrights, and related government protections as “intellectual property rights.” The second area of problems for competition policy arises because that is something of a misnomer. These legal