Reflections on the GMU/Microsoft Conference

Geoffrey Manne —  14 May 2007

As you may know, this past Friday we (Geoff and Josh) organized the inaugural GMU/Microsoft Conference on the Law and Economics of Innovation. Overall, we were extremely pleased with our first entry in this conference series, The Regulation of Innovation and Economic Growth. We had about 130 register for the conference, including many high level FTC and DOJ officials, academics, and industry representatives. In the end we had about 95 attendees. We also hosted a dinner for about 45 Washington VIPs (several FTC folks, a federal judge, prominent attorneys, representatives from USTR and Commerce, etc.) the evening before at Citronelle. A good time and good conversation were had by all.

The conference started off on the right foot with an opening address from Bob Cooter (Berkeley Law) which pointed to institutional and legal solutions to the “double trust problem” in innovation as a primary factor in unleashing entrepreneurial forces in countries facing high levels of poverty and stagnant growth. The basic point was that various institutions—including importantly IP laws—serve to facilitate the essential melding of ideas and capital necessary to promote innovation and to encourage economic growth. The talk was derived from a book Cooter is currently writing (with Hans-Bernd Schaefer), two draft chapters of which are available here.

The three subsequent panels discussed the innovative process & bundling in technology markets, IP Reform, and Antitrust Regulation of Innovation. The papers are available here. We both took notes on the presentations and share some reflections on the papers and discussions below the fold.

Marco Iansiti (Harvard Business) opened up the morning panel with a fascinating look at the innovative process itself. The central point of this paper (co-authored by Greg Richards) was to highlight how technological innovations that were once stand-alone products subsequently become integrated into broader platforms which themselves are subsequently used for further innovation. Iansiti went on to discuss how this cumulative view of the innovative process, which is a modified view of the traditional “S-Curve” Schumpeterian model of creative destruction, might impact how we think about IP protections. In particular, in a world where recombination and integration of prior art are the norm, effective licensing (not necessarily weakening of rights) may be the keys to a well-functioning system of innovation. We will be interested to read Iansiti’s views on the implications of this concept of innovation for antitrust analysis of innovative markets in the final version of his paper.

Stan Liebowitz (UT/Dallas Business) and Steve Margolis’ (NC State Business) presentation on bundling was particularly interesting in light of the recent increased antitrust scrutiny of bundling and tying. Liebowitz & Margolis emphasized minimization of transaction costs as the primary motivation for the practice, and also highlighted just how rare “a la carte” pricing is in the real world. Another point emphasized in their paper, available here, was that the popular description of the possibility theorems of anticompetitive effects generated by bundling in the “Post-Chicago” literature is misleading. Liebowitz and Margolis point out that Posner (and a commenter pointed out that this also applies to Levi and Director) anticipated the spirit of the foreclosure and leveraging arguments against bundling and rejected them as empirically irrelevant—not theoretically impossible. Josh’s colleague Bruce Kobayashi, who moderated the panel and has made substantial contributions to the bundling literature in his own right, closed with some insightful comments about the lack of robustness of the anticompetitive theories in bundling to real world and experimental testing and a critique of the LePage’s decision which is threatening to wreak a good amount of havoc in this area

The second panel, moderated by Randy Picker (Chicago Law), featured two very excellent papers: one by Doug Lichtman (Chicago Law en route to UCLA Law) (with Mark Lemley) and the other by Howard Shelanski (Berkeley Law). Lichtman gave an excellent and spirited defense of Lichtman and Lemley’s call for reform of the patent presumption of validity. Here the idea is that institutional limitations at the USPTO counsel strongly against the presumption of validity, and its removal should improve the quality of patents. Lichtman/Lemley also suggest the possibility that applicants would be permitted to purchase “gold-plated” review that would lead to a validity presumption, thus enabling applicants to signal their high-quality patents at the outset.

Shelanski tackled a problem relevant to both IP and antitrust by asking what effect IP reform should have on antitrust standards for unilateral refusal to deal under Section 2 (decreasing patent protection reduces the problems, if any, with refusals to deal). Both papers were extremely interesting and touched upon important issues in patent reform, and were followed by a spirited Q & A session between the moderator, the authors, and the audience.

The third panel, moderated by Jon Baker (WCL, American University), focused on antitrust and innovation and featured papers presented by Dan Spulber, Keith Hylton, and Josh. Hylton’s paper highlighted important differences between American and EU monopolization doctrine “on the book” and in the case law, offered a justification for US approach based on error-cost analysis, and presented empirical evidence suggesting that the scope of a country’s monopolization doctrine is inversely correlated to its degree of trade dependence. Although the empirical conclusions are necessarily tenuous, Hylton’s paper provides nice evidence of the benefit of US-style antitrust law. Josh’s paper offered a methodological critique of economic analysis of welfare when both static price and innovation effects are at issue, pointing out that our current theoretical and empirical knowledge of the relationship between competition and innovation justifies a deferential approach to antitrust intervention and humility grounded in an understanding of the large magnitude of Type I error costs in this setting.

Spulber’s paper attracted the most discussion from the audience and commentators, as it challenged the conventional wisdom that the presence of network effects lead to market failure. Spulber argued that antitrust analysis should be indifferent to the presence of network effects in an industry—justifying neither a more aggressive approach nor immunity from prosecution. While most agreed with this conclusion, there was a spirited discussion concerning just how important network effects or switching costs are to competitive outcomes. We believe that Spulber’s paper, along with the pioneering work of Liebowitz & Margolis in this area, call for a more realistic approach to antitrust analysis in industries with network effects, relying less on presumptions of market failure and more on hands-on analysis. And we both noted that empirical evidence on the importance of switching costs and network effects in the real world would improve policy analysis in this area. Most importnantly, all of the papers in this panel suggest strongly that antitrust authorities demonstrate more humility in the face of significant uncertainty about the workings of innovative markets.

Finally, our day ended with a discussion between two industry representatives (Dave Heiner of Microsoft and John Thorne of Verizon), a government representative (Gerald Masoudi of the DOJ Antitrust Division), and our moderator Ron Cass (Center for the Rule of Law). The discussion focused on practical problems faced by these firms in complying with divergent remedies across competition authorities, IP regimes and courts–e.g. selling fragmented versions of Windows in different jurisdictions.

All in all, we were very happy with the outcome which could not have been achieved without a great deal of support from the folks at George Mason, Microsoft, and various others that helped us plan the event, logistics, dinner, website, and all the various inputs that go into an event like this. Most importantly, we want to take a moment to thank all of those who participated in the conference by submitting a paper or moderating a panel. We could not have been happier with the quality of papers and discussion that took place and look to build upon the success next year. Look for these papers along with responses from moderators in a future publication (details TBA).

If you have ideas for specific topics that they would like to see discussed in year 2 of the GMU/ Microsoft Conference on the Law and Economics of Innovation — feel free to email one or both of us.

Geoffrey Manne

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President & Founder, International Center for Law & Economics

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