Competition policy and intellectual property rights - legal and economic perspectives

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Date: Summer 2014
From: Antitrust Bulletin(Vol. 59, Issue 2)
Publisher: Sage Publications, Inc.
Document Type: Article
Length: 2,876 words
Lexile Measure: 1720L

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This symposium issue of The Antitrust Bulletin considers, from legal, economic, and historical perspectives, a number of topics at the juncture of antitrust policy and intellectual property rights. Intellectual property rights and competition policy can, and frequently do, act in harmony. The U.S. antitrust authorities have clearly articulated the central role of innovation in fostering competition. (1) The U.S. Constitution provides for intellectual property rights, such as patents, as a means of encouraging innovation. (2) Enforceable patent rights enable inventors to deter or stop others from misappropriating their creations, so that they may profit by licensing or selling their inventions. (3) In principle, this mechanism is simple: Patents afford their owners the right to exclude others from the right to use the patented technologies. This right of exclusion can be viewed as a necessary (but, as we shall see, not sufficient) condition for patent holders to successfully demand positive royalties from those who desire to practice their technologies.

Economists have long understood that inventors bear the explicit and opportunity costs of innovative activity in the hope of profits, which may prove elusive when intellectual property rights are weak because of the risk of misappropriation. Economists also have recognized that invention is a key aspect of the more general process of competition, as businesses battle to gain customers and sales by offering products that embody superior technologies. (4) Because the intellectual roughly equivalent in terms of their capabilities, quality, and costs of implementation net of licensing fees, the royalty rates charged to the users of the technology will also approach marginal cost (that is, they too will be relatively small). The situation will differ when the substitute technologies on offer are differentiated to a significant degree. When imperfect competition exists among the alternative technologies, it is possible to characterize a "competitive" royalty rate for the preferred intellectual property as a function of the incremental value of that technology relative to the next-best option. This is the fundamental economic basis for the view that "reasonable and nondiscriminatory" (RAND or FRAND) (6) royalty rates, which frequently are required by standards bodies when a patented technology is to be included in an industry standard, should be calculated on the basis of the incremental value of the preferred technology relative to its next-best alternative. (7)

Standard setting organizations (SSOs) often require contributed technologies to be provided at RAND (or FRAND) rates because including a technology in an industry standard can change the relative bargaining positions of the owners and users of the technology. When a technology is included in an industry standard and producers have committed resources to producing standard-compliant products, the latter can become locked in to using the patent holder's technology. This would occur when the producers have made significant and irreversible commitments to use of the patented technology. Such commitments may take the form of sizeable up-front investments in plant, equipment, or product design that would be lost (and would need to be replaced) if the patented technology was abandoned in favor...

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Gale Document Number: GALE|A382319582