Archives For Damien Geradin

The European Commission recently issued a formal Statement of Objections (SO) in which it charges Apple with antitrust breach. In a nutshell, the commission argues that Apple prevents app developers—in this case, Spotify—from using alternative in-app purchase systems (IAPs) other than Apple’s own, or steering them towards other, cheaper payment methods on another site. This, the commission says, results in higher prices for consumers in the audio streaming and ebook/audiobook markets.

More broadly, the commission claims that Apple’s App Store rules may distort competition in markets where Apple competes with rival developers (such as how Apple Music competes with Spotify). This explains why the anticompetitive concerns raised by Spotify regarding the Apple App Store rules have now expanded to Apple’s e-books, audiobooks and mobile payments platforms.

However, underlying market realities cast doubt on the commission’s assessment. Indeed, competition from Google Play and other distribution mediums makes it difficult to state unequivocally that the relevant market should be limited to Apple products. Likewise, the conduct under investigation arguably solves several problems relating to platform dynamics, and consumers’ privacy and security.

Should the relevant market be narrowed to iOS?

An important first question is whether there is a distinct, antitrust-relevant market for “music streaming apps distributed through the Apple App Store,” as the EC posits.

This market definition is surprising, given that it is considerably narrower than the one suggested by even the most enforcement-minded scholars. For instance, Damien Geradin and Dimitrias Katsifis—lawyers for app developers opposed to Apple—define the market as “that of app distribution on iOS devices, a two-sided transaction market on which Apple has a de facto monopoly.” Similarly, a report by the Dutch competition authority declared that the relevant market was limited to the iOS App Store, due to the lack of interoperability with other systems.

The commission’s decisional practice has been anything but constant in this space. In the Apple/Shazam and Apple/Beats cases, it did not place competing mobile operating systems and app stores in separate relevant markets. Conversely, in the Google Android decision, the commission found that the Android OS and Apple’s iOS, including Google Play and Apple’s App Store, did not compete in the same relevant market. The Spotify SO seems to advocate for this definition, narrowing it even further to music streaming services.

However, this narrow definition raises several questions. Market definition is ultimately about identifying the competitive constraints that the firm under investigation faces. As Gregory Werden puts it: “the relevant market in an antitrust case […] identifies the competitive process alleged to be harmed.”

In that regard, there is clearly some competition between Apple’s App Store, Google Play and other app stores (whether this is sufficient to place them in the same relevant market is an empirical question).

This view is supported by the vast number of online posts comparing Android and Apple and advising consumers on their purchasing options. Moreover, the growth of high-end Android devices that compete more directly with the iPhone has reinforced competition between the two firms. Likewise, Apple has moved down the value chain; the iPhone SE, priced at $399, competes with other medium-range Android devices.

App developers have also suggested they view Apple and Android as alternatives. They take into account technical differences to decide between the two, meaning that these two platforms compete with each other for developers.

All of this suggests that the App Store may be part of a wider market for the distribution of apps and services, where Google Play and other app stores are included—though this is ultimately an empirical question (i.e., it depends on the degree of competition between both platforms)

If the market were defined this way, Apple would not even be close to holding a dominant position—a prerequisite for European competition intervention. Indeed, Apple only sold 27.43% of smartphones in March 2021. Similarly, only 30.41% of smartphones in use run iOS, as of March 2021. This is well below the lowest market share in a European abuse of dominance—39.7% in the British Airways decision.

The sense that Apple and Android compete for users and developers is reinforced by recent price movements. Apple dropped its App Store commission fees from 30% to 15% in November 2020 and Google followed suit in March 2021. This conduct is consistent with at least some degree of competition between the platforms. It is worth noting that other firms, notably Microsoft, have so far declined to follow suit (except for gaming apps).

Barring further evidence, neither Apple’s market share nor its behavior appear consistent with the commission’s narrow market definition.

Are Apple’s IAP system rules and anti-steering provisions abusive?

The commission’s case rests on the idea that Apple leverages its IAP system to raise the costs of rival app developers:

 “Apple’s rules distort competition in the market for music streaming services by raising the costs of competing music streaming app developers. This in turn leads to higher prices for consumers for their in-app music subscriptions on iOS devices. In addition, Apple becomes the intermediary for all IAP transactions and takes over the billing relationship, as well as related communications for competitors.”

However, expropriating rents from these developers is not nearly as attractive as it might seem. The report of the Dutch competition notes that “attracting and maintaining third-party developers that increase the value of the ecosystem” is essential for Apple. Indeed, users join a specific platform because it provides them with a wide number of applications they can use on their devices. And the opposite applies to developers. Hence, the loss of users on either or both sides reduces the value provided by the Apple App Store. Following this logic, it would make no sense for Apple to systematically expropriate developers. This might partly explain why Apple’s fees are only 30%-15%, since in principle they could be much higher.

It is also worth noting that Apple’s curated App Store and IAP have several redeeming virtues. Apple offers “a highly curated App Store where every app is reviewed by experts and an editorial team helps users discover new apps every day.”  While this has arguably turned the App Store into a relatively closed platform, it provides users with the assurance that the apps they find there will meet a standard of security and trustworthiness.

As noted by the Dutch competition authority, “one of the reasons why the App Store is highly valued is because of the strict review process. Complaints about malware spread via an app downloaded in the App Store are rare.” Apple provides users with a special degree of privacy and security. Indeed, Apple stopped more than $1.5 billion in potentially fraudulent transactions in 2020, proving that the security protocols are not only necessary, but also effective. In this sense, the App Store Review Guidelines are considered the first line of defense against fraud and privacy breaches.

It is also worth noting that Apple only charges a nominal fee for iOS developer kits and no fees for in-app advertising. The IAP is thus essential for Apple to monetize the platform and to cover the costs associated with running the platform (note that Apple does make money on device sales, but that revenue is likely constrained by competition between itself and Android). When someone downloads Spotify from the App Store, Apple does not get paid, but Spotify does get a new client. Thus, while independent developers bear the costs of the app fees, Apple bears the costs and risks of running the platform itself.

For instance, Apple’s App Store Team is divided into smaller teams: the Editorial Design team, the Business Operations team, and the Engineering R&D team. These teams each have employees, budgets, and resources for which Apple needs to pay. If the revenues stopped, one can assume that Apple would have less incentive to sustain all these teams that preserve the App Store’s quality, security, and privacy parameters.

Indeed, the IAP system itself provides value to the Apple App Store. Instead of charging all of the apps it provides, it takes a share of the income from some of them. As a result, large developers that own in-app sales contribute to the maintenance of the platform, while smaller ones are still offered to consumers without having to contribute economically. This boosts Apple’s App Store diversity and supply of digital goods and services.

If Apple was forced to adopt another system, it could start charging higher prices for access to its interface and tools, leading to potential discrimination against the smaller developers. Or, Apple could increase the prices of handset devices, thus incurring higher costs for consumers who do not purchase digital goods. Therefore, there are no apparent alternatives to the current IAP that satisfy the App Store’s goals in the same way.

As the Apple Review Guidelines emphasize, “for everything else there is always the open Internet.” Netflix and Spotify have ditched the subscription options from their app, and they are still among the top downloaded apps in iOS. The IAP system is therefore not compulsory to be successful in Apple’s ecosystem, and developers are free to drop Apple Review Guidelines.

Conclusion

The commission’s case against Apple is based on shaky foundations. Not only is the market definition extremely narrow—ignoring competition from Android, among others—but the behavior challenged by the commission has a clear efficiency-enhancing rationale. Of course, both of these critiques ultimately boil down to empirical questions that the commission will have overcome before it reaches a final decision. In the meantime, the jury is out.

TOTM is pleased to welcome guest blogger Nicolas Petit, Professor of Law & Economics at the University of Liege, Belgium.

Nicolas has also recently been named a (non-resident) Senior Scholar at ICLE (joining Joshua Wright, Joanna Shepherd, and Julian Morris).

Nicolas is also (as of March 2017) a Research Professor at the University of South Australia, co-director of the Liege Competition & Innovation Institute and director of the LL.M. program in EU Competition and Intellectual Property Law. He is also a part-time advisor to the Belgian competition authority.

Nicolas is a prolific scholar specializing in competition policy, IP law, and technology regulation. Nicolas Petit is the co-author (with Damien Geradin and Anne Layne-Farrar) of EU Competition Law and Economics (Oxford University Press, 2012) and the author of Droit européen de la concurrence (Domat Montchrestien, 2013), a monograph that was awarded the prize for the best law book of the year at the Constitutional Court in France.

One of his most recent papers, Significant Impediment to Industry Innovation: A Novel Theory of Harm in EU Merger Control?, was recently published as an ICLE Competition Research Program White Paper. His scholarship is available on SSRN and he tweets at @CompetitionProf.

Welcome, Nicolas!

Last Monday, a group of nineteen scholars of antitrust law and economics, including yours truly, urged the U.S. Court of Appeals for the Eleventh Circuit to reverse the Federal Trade Commission’s recent McWane ruling.

McWane, the largest seller of domestically produced iron pipe fittings (DIPF), would sell its products only to distributors that “fully supported” its fittings by carrying them exclusively.  There were two exceptions: where McWane products were not readily available, and where the distributor purchased a McWane rival’s pipe along with its fittings.  A majority of the FTC ruled that McWane’s policy constituted illegal exclusive dealing.

Commissioner Josh Wright agreed that the policy amounted to exclusive dealing, but he concluded that complaint counsel had failed to prove that the exclusive dealing constituted unreasonably exclusionary conduct in violation of Sherman Act Section 2.  Commissioner Wright emphasized that complaint counsel had produced no direct evidence of anticompetitive harm (i.e., an actual increase in prices or decrease in output), even though McWane’s conduct had already run its course.  Indeed, the direct evidence suggested an absence of anticompetitive effect, as McWane’s chief rival, Star, grew in market share at exactly the same rate during and after the time of McWane’s exclusive dealing.

Instead of focusing on direct evidence of competitive effect, complaint counsel pointed to a theoretical anticompetitive harm: that McWane’s exclusive dealing may have usurped so many sales from Star that Star could not achieve minimum efficient scale.  The only evidence as to what constitutes minimum efficient scale in the industry, though, was Star’s self-serving statement that it would have had lower average costs had it operated at a scale sufficient to warrant ownership of its own foundry.  As Commissioner Wright observed, evidence in the record showed that other pipe fitting producers had successfully entered the market and grown market share substantially without owning their own foundry.  Thus, actual market experience seemed to undermine Star’s self-serving testimony.

Commissioner Wright also observed that complaint counsel produced no evidence showing what percentage of McWane’s sales of DIPF might have gone to other sellers absent McWane’s exclusive dealing policy.  Only those “contestable” sales – not all of McWane’s sales to distributors subject to the full support policy – should be deemed foreclosed by McWane’s exclusive dealing.  Complaint counsel also failed to quantify sales made to McWane’s rivals under the generous exceptions to its policy.  These deficiencies prevented complaint counsel from adequately establishing the degree of market foreclosure caused by McWane’s policy – the first (but not last!) step in establishing the alleged anticompetitive harm.

In our amicus brief, we antitrust scholars take Commissioner Wright’s side on these matters.  We also observe that the Commission failed to account for an important procompetitive benefit of McWane’s policy:  it prevented rival DIPF sellers from “cherry-picking” the most popular, highest margin fittings and selling only those at prices that could be lower than McWane’s because the cherry-pickers didn’t bear the costs of producing the full line of fittings.  Such cherry-picking is a form of free-riding because every producer’s fittings are more highly valued if a full line is available.  McWane’s policy prevented the sort of free-riding that would have made its production of a full line uneconomical.

In short, the FTC’s decision made it far too easy to successfully challenge exclusive dealing arrangements, which are usually procompetitive, and calls into question all sorts of procompetitive full-line forcing arrangements.  Hopefully, the Eleventh Circuit will correct the Commission’s mistake.

Other professors signing the brief include:

  • Tom Arthur, Emory Law
  • Roger Blair, Florida Business
  • Don Boudreaux, George Mason Economics (and Café Hayek)
  • Henry Butler, George Mason Law
  • Dan Crane, Michigan Law (and occasional TOTM contributor)
  • Richard Epstein, NYU and Chicago Law
  • Ken Elzinga, Virginia Economics
  • Damien Geradin, George Mason Law
  • Gus Hurwitz, Nebraska Law (and TOTM)
  • Keith Hylton, Boston University Law
  • Geoff Manne, International Center for Law and Economics (and TOTM)
  • Fred McChesney, Miami Law
  • Tom Morgan, George Washington Law
  • Barack Orbach, Arizona Law
  • Bill Page, Florida Law
  • Paul Rubin, Emory Economics (and TOTM)
  • Mike Sykuta, Missouri Economics (and TOTM)
  • Todd Zywicki, George Mason Law (and Volokh Conspiracy)

The brief’s “Summary of Argument” follows the jump. Continue Reading…

Catching up on my blog reading, I see Chillin’ Competition had a Friday Slot interview with Damien Geradin recently, as well.  Also worth checking out.  I especially like this:

What you like the least about economics in competition law?

Mind boggling theories disconnected from the real world. These are a complete waste of time.

Amen, Brother!

The Henry G. Manne Program in Law & Economics Studies and Google present a conference on The Law and Economics of Search Engines and Online Advertising to be held at George Mason University School of Law, Thursday, June 16th, 2011. The conference will run from 8:30 A.M. to 5:00 P.M.

OVERVIEW:

This conference is organized by Henry N. Butler, Executive Director of the Law & Economics Center and George Mason Foundation Professor of Law at George Mason University School of Law, and Joshua D. Wright, Associate Professor of Law at George Mason University School of Law.

Search and online advertising are important parts of the economy. They are also young industries. As such, understanding both the way in which search and online advertising operate as well as how these markets may evolve is fundamental to any economic and policy discussion. A deep understanding of the technology and economics of search, network effects, the antitrust economics of market definition, and the relationship between search and online advertising are required to facilitate sensible policies in this area. This conference seeks to address these issues by inviting experts in the field to present their views and engage with each other about the economic realities of search and online advertising.

REGISTRATION:

Attendance for this conference is by invitation only. To receive an invitation, please send a message with your name, affiliation, and full contact information to:

Contact: Jeff Smith
Email: jsmithQ@gmu.edu

AGENDA:

Thursday, June 16, 2011:

7:30 – 8:20 A.M.: Registration and breakfast

8:30 – 10:00 A.M.:  PANEL 1: What Role Do Network Effects Play In the Search Market?

Network effects often play an important role in analyzing competition in high-tech markets. Network effects present opportunities for enhanced consumer welfare, but also can create the potential for competitive harms. Potential network effects must be examined in a market and technology specific-context in order to understand their likely effects. This panel takes up this question by re-examining what network externalities and network effects are and analyzing whether they are present in search and related technologies. Panelists:

  • Michael L. Katz, Sarin Chair in Strategy and Leadership, University of California, Berkeley
  • Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Stanley J. Liebowitz, Ashbel Smith Professor of Economics, University of Texas at Dallas
  • William H. Page, Marshall M. Criser Eminent Scholar, University of Florida Levin College of Law (moderator)

10:30 A.M. – 12:00 P.M.: PANEL 2: Competition and Online Advertising

Defining online markets is a complex and difficult task. Are advertising markets the same across web properties? What is the relationship between online and offline properties or text ads and display ads? Is the ad market for search services and content services different? This panel explores competition and online advertising. Panelists:

  • Damien Geradin, Professor of Competition Law and Economics, Tilburg University
  • Daniel L. Rubinfeld, Robert L. Bridges Professor of Law and Professor of Economics, University of California, Berkeley
  • Catherine Tucker, Douglas Drane Career Development Professor in IT and Management and Assistant Professor of Marketing, MIT Sloan School of Management
  • Michael R. Baye, Bert Elwart Professor of Business and Professor of Business Economics & Public Policy, Indiana University Kelley School of Business (moderator)

12:00 – 1:30 P.M.: LUNCH and KEYNOTE:

Engineering Search – Mark Paskin, Software Engineer, Search Quality, Google,Inc.


1:30 – 3:30 P.M.: PANEL 3: Competition and Search Markets

Much of the policy discussion on competition and search has centered on firms who participate in the search market in the traditional sense, such as Bing, Yahoo!, Blekko, Google, and others. However, the Internet provides many other ways for users to engage with and take advantage of its benefits. Vertical search markets such as Amazon or travel sites present examples of competition in search. Social media platforms (e.g., Facebook and Twitter) and the rise of mobile apps also present a competitive challenge for search. Furthermore, news sites, direct navigation, and offline information relate to our understanding of the proper market definition in search. This panel examines how platforms compete against search and the implications of that competition. Panelists:

  • Benjamin G. Edelman, Assistant Professor of Business Administration, Harvard Business School
  • Randal C. Picker, Leffman Professor of Commercial Law, University of Chicago Law School
  • Paul Liu, Senior Economist, Google, Inc.
  • Thomas M. Lenard, President and Senior Fellow, Technology Policy Institute (moderator)

3:30 – 5:00 P.M.: PANEL 4: The Potential Costs and Benefits of Search Regulation

Some commentators have raised the question of whether search providers are sufficiently “neutral” in presenting results, which begs the question of whether concepts such as “objectivity” and “neutrality” are desirable or even achievable in the search industry. This panel will examine these questions and explore what impact regulatory efforts to impose “neutrality” principles might have on consumer welfare and on the innovation being driven by companies like Google, Bing, and Facebook. Panelists:

  • Eric Goldman, Associate Professor of Law and Director of the High Tech Law Institute, Santa Clara University School of Law
  • David Balto, Senior Fellow, Center for American Progress
  • Frank Pasquale, Schering-Plough Professor in Health Care Regulation and Enforcement, Seton Hall University School of Law
  • Joshua D. Wright, Associate Professor of Law, George Mason University School of Law (moderator)

VENUE:

George Mason University School of Law
3301 Fairfax Drive
Arlington, VA 22201

CONFERENCE HOTEL:

The Westin Arlington Gateway
801 North Glebe Road
Arlington, VA 22203
(703) 717-6200

FURTHER INFORMATION:

For more information regarding this conference or other initiatives of the Law & Economics Center, please visit MasonLEC.org.

 

Our book, Competition Policy and Patent Law Under Uncertainty: Regulating Innovation will be published by Cambridge University Press in July.  The book’s page on the CUP website is here.

I just looked at the site to check on the publication date and I was delighted to see the advance reviews of the book.  They are pretty incredible, and we’re honored to have such impressive scholars, among the very top in our field and among our most significant influences, saying such nice things about the book:

After a century of exponential growth in innovation, we have reached an era of serious doubts about the sustainability of the trend. Manne and Wright have put together a first-rate collection of essays addressing two of the important policy levers – competition law and patent law – that society can pull to stimulate or retard technological progress. Anyone interested in the future of innovation should read it.

Daniel A. Crane, University of Michigan

Here, in one volume, is a collection of papers by outstanding scholars who offer readers insightful new discussions of a wide variety of patent policy problems and puzzles. If you seek fresh, bright thoughts on these matters, this is your source.

Harold Demsetz, University of California, Los Angeles

This volume is an essential compendium of the best current thinking on a range of intersecting subjects – antitrust and patent law, dynamic versus static competition analysis, incentives for innovation, and the importance of humility in the formulation of policies concerning these subjects, about which all but first principles are uncertain and disputed. The essays originate in two conferences organized by the editors, who attracted the leading scholars in their respective fields to make contributions; the result is that rara avis, a contributed volume more valuable even than the sum of its considerable parts.

Douglas H. Ginsburg, Judge, US Court of Appeals, Washington, DC

Competition Policy and Patent Law under Uncertainty is a splendid collection of essays edited by two top scholars of competition policy and intellectual property. The contributions come from many of the world’s leading experts in patent law, competition policy, and industrial economics. This anthology takes on a broad range of topics in a comprehensive and even-handed way, including the political economy of patents, the patent process, and patent law as a system of property rights. It also includes excellent essays on post-issuance patent practices, the types of practices that might be deemed anticompetitive, the appropriate role of antitrust law, and even network effects and some legal history. This volume is a must-read for every serious scholar of patent and antitrust law. I cannot think of another book that offers this broad and rich a view of its subject.

Herbert Hovenkamp, University of Iowa

With these contributors:

Robert Cooter, Richard A. Epstein, Stan J. Liebowitz, Stephen E. Margolis, Daniel F. Spulber, Marco Iansiti, Greg Richards, David Teece, Joshua D. Wright, Keith N. Hylton, Haizhen Lee, Vincenzo Denicolò, Luigi Alberto Franzoni, Mark Lemley, Douglas G. Lichtman, Michael Meurer, Adam Mossoff, Henry Smith, F. Scott Kieff, Anne Layne-Farrar, Gerard Llobet, Jorge Padilla, Damien Geradin and Bruce H. Kobayashi

I would have said the book was self-recommending.  But I’ll take these recommendations any day.

HT: Danny Sokol.

Name (Institution) Number of New Downloads

  1. Herb Hovenkamp (University of Iowa) 7532
  2. David Evans (University College, University of Chicago) 7133
  3. Damien Geradin (Tilburg, University of Michigan) 6394
  4. Josh Wright (George Mason) 4733
  5. Randy Picker (University of Chicago) 3170
  6. Marc Edelman (Barry University) 3005
  7. Bob Lande (University of Baltimore) 2759
  8. Michael McCann (Vermont Law School) 2637
  9. Spencer Waller (Chicago Loyola) 2546
  10. Maurice Stucke (University of Tennessee) 2237
  11. Barak Orbach (University of Arizona) 1919
  12. Phil Weiser (University of Colorado) 1974
  13. Jon Baker (American University) 1924
  14. Einer Elhauge (Harvard University) 1877
  15. Keith Hylton (Boston University) 1826
  16. Danny Sokol (University of Florida) 1965
  17. Scott Hemphill (Columbia University) 1489
  18. Dan Crane (University of Michigan) 1487
  19. Geoff Manne (Lewis & Clark) 1247
  20. Bill Page (University of Florida) 1111
  21. Barak Richman (Duke University) 1111

Danny Sokol has posted the most downloaded antitrust law professors.  I come in 4th behind Damien Geradin, David Evans, and Herb Hovenkamp.   It is flattering to be in company like that by any measure.  Cool.  But, as Danny points out, what is even cooler is that George Mason is one of only a handful of schools with more than one faculty member making the list, with my colleague, co-author, and fellow Bruin economist Bruce Kobayashi coming in at #15.

It is quite true that George Mason is a special place to learn, teach and write about antitrust.  This is at least in part because of the law and economics focus embedded into the core of our educational mission which ties so well with courses like antitrust.  But one need not rely on the rankings to figure out George Mason’s antitrust presence.  In fact, SSRN downloads underestimate our antitrust presence in a few very important ways.  First is that the SSRN measure misses our “signature” antitrust faculty member, former Chairman and FTC Kirkpatrick Award winner Tim Muris.   Second, there is long and deep history of antitrust at George Mason.  Consider the following list of current and former antitrust professors at George Mason,  including those who have taught as adjuncts, include: Alden Abbott (FTC), Henry Butler (now back at George Mason as the Executive Director of the Law and Economics Center), Mark Grady (now at UCLA), Commissioner (and former Chairman) Kovacic, the late Ernest Gellhorn, the late Jim Liebeler (who I worked for at UCLA), Bruce Johnsen, and Judge Douglas Ginsburg.   And I’m sure I’m missing a few!  Third, escaping rankings like these are faculty members like Tom Hazlett, who teaches a seminar on the law and economics of telecommunications and media regulation which involves a substantial amount of competition policy, and Todd Zywicki, who was former Director of the Office of Policy and Planning at the FTC and teaches about competition policy and regulation in his public choice seminar and writes about these issues in the credit card market.

There are a lot of very good places to learn about antitrust as a law student and a number of great environments to do antitrust research, writing and teaching as a professor: Georgetown, NYU, Iowa, Michigan, Florida, Yale, and Chicago all come immediately to mind.  There are others I’m sure — though it is sad for me to see that the West Coast has pretty much surrendered this increasingly important territory entirely with very few exceptions.  I’m biased, of course.  But I simply don’t think there is a better place in the country to do antitrust  — and I’m very proud and humbled to be a part of the “antitrust group” at George Mason.

Later this year Josh and I have an edited volume with the above title coming out with Cambridge University Press.  The list of contributors is phenomenal, including:

  • Bob Cooter
  • Vincenzo Denicolo
  • Richard Epstein
  • Luigi Franzoni
  • Damien Geradin
  • Keith Hylton
  • Marco Iansiti
  • Scott Kieff
  • Bruce Kobayashi
  • Haizhen Lee
  • Stan Leibowitz
  • Mark Lemley
  • Doug Lichtman
  • Steve Margolis
  • Mike Meurer
  • Adam Mossoff
  • Greg Richards
  • Greg Sidak
  • Henry Smith
  • Dan Spulber
  • David Teece
  • Josh Wright

Our introductory essay, available here, discusses the papers and lays out some of our thoughts about what we know (or don’t know) about how to encourage innovation through competition and patent laws. As they say, get it while it’s hot!

The abstract for the introduction:

This essay is the introduction to a forthcoming volume entitled, Regulating Innovation: Competition Policy and Patent Law Under Uncertainty (Cambridge U. Press 2009 forthcoming).

In addition to introducing all of the papers in the volume, this essay introduces the organizing themes of the volume. Innovation is critical to economic growth. While it is well understood that legal institutions play an important role in fostering an environment conducive to innovation and its commercialization, much less is known about the optimal design of specific institutions. Regulatory design decisions, and in particular competition policy and intellectual property regimes, can have profoundly positive or negative consequences for economic growth and welfare. However, the ratio of what is known to unknown with respect to the relationship between innovation, competition, and regulatory policy is staggeringly low. In addition to this uncertainty concerning the relationships between regulation, innovation, and economic growth, the process of innovation itself is not well understood.

The regulation of innovation and the optimal design of legal institutions in this environment of uncertainty are two of the most important policy challenges of the 21st century. Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors and foster economic growth. Unfortunately, as this essay describes, our tools for assessing these tradeoffs are limited.

Any coherent regulatory framework must take account of the low level of empirical knowledge surrounding the complex relationship between regulation – both through competition policy and patent law – and innovation, and the corresponding uncertainty caused by this absence of knowledge. The relationship between regulation and innovation has posed a significant challenge to antitrust economists at least since Schumpeter’s suggestion that dynamic competition would result in “creative destruction,” leading to a competitive process where one monopolist would replace another sequentially as new entrants developed a superior product.

Interfering in this dynamic process for the sake of static efficiency gains is perilous, but, of course, not impossible. But regulators and policy makers must take (more) seriously the condition of fundamental uncertainty in which they act, and the significant costs of their inevitable errors before justifying interventions on grounds of promoting competition or facilitating innovation.

This essay and the chapters in this book, approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers. The strength of this analysis—often described as the New Institutional Economic approach—is in its recognition that understanding economic performance requires not only economic modeling of narrow behavior, but also an understanding of that behavior in its legal, economic, social, and political institutional context.

The essay includes a table of contents for the book.

This post is from F. Scott Kieff (Wash U./ Hoover)

I, too, join the rest of the participants in congratulating Michael Carrier on this great book about this great topic.  I have enjoyed reading Michael’s work in the past and I enjoyed meeting him at a conference last year.  He is a wonderfully warm, bright, and engaging person.  Although I wish that I had more of an opportunity to fully read his impressive text before the date of this on-line symposium, I am grateful for the opportunity to read a great deal of the book and to at least skim the remainder.  The wonderful conference that Damien Geradin and his colleagues hosted on these same issues in Amsterdam these past few days was a pleasant distraction.  (For Damien’s conference click here).

Because I share everyone’s support for Michael and his new book, as already detailed by others, I will focus my contribution here on some ways in which the book might have been able to achieve a greater impact.  Recognizing that every project could be improved in some ways, and that ultimately the author must make the difficult choices between completeness and clarity, about his own voice and message, etc, I offer my comments on the chance that those who read Michael’s great book might wonder whether there happens to have been or remain different approaches to the ideas he explores.

As it turns out, the interface between patents and antitrust was one of the two central motivators behind the present US patent statutes, which were codified as the 1952 Patent Act.  In fact, one of the two principle drafters of the ’52 Act, Giles Rich, wrote a series of five articles in the 1940’s that bear a title not unlikely to show up in a computer search on this topic.  (The other principle drafter who also wrote a great deal about the statute was Pat Federico).  And while the 1940’s were indeed a long time ago, because Giles Rich went on to be the longest sitting federal judge, the world’s most famous patent scholar and jurist, the widely recognized father of the modern American Patent System, and a judge on the court that hears most patent appeals, these papers were conveniently republished in a 2004-2005 volume of the Federal Circuit Bar Journal.  The citation is:  Giles S. Rich, “The Relation Between Patent Practices and the Anti-Monopoly Laws,” 14 Fed. Circuit B.J., at pages 5, 21, 37, 67, and 87 (2004-2005).  (The other articles by Judge Rich that are republished in that volume also are instructive on the points explored in Michael’s book).

Judge Rich explored an approach that is focused on predictable validity and enforcement rules rather than the more flexible approaches advocated by Michael (and many others).  Rich was not alone.  His approach was followed in the writings of a diverse group of leading commercial jurists at the time like Learned Hand and Jerome Frank.  (It is worth noting for reasons explored below that if using modern political labels, Judge Frank would be seen as a liberal populist).

The judiciary was not the only branch of government to follow Rich’s view.  Rich provided extensive explicit testimony before Congress about the goals of the ’52 Act in re-aligning the interface between patents and antitrust and in creating an objective standard for determining patent validity.   Congress agreed with the approach he offered in his testimony when it voted for the statute.  The Supreme Court in turn expressly and extensively relied on that legislative history, and especially Judge Rich’s testimony, in the well-known Dawson decision on patents and antitrust in 1980.  That approach was also affirmed by the current Supreme Court in the ITW v. III case. 

As Judge Pauline Newman has reminded on several occasions in law review articles and speeches, we can fast forward to the late 1970’s, when the economy was in difficult times, like it was in the 1940’s and is today, to see that a very diverse pair of US Presidents decided to also adopt an approach to patents like that urged by Rich, Federico, Hand, Frank, and others.  President Carter decided, after a careful study, to put forth a statute designed to strengthen the patent system by creating the Federal Circuit, and President Reagan signed the bill after Congress passed it.

For the past several years, there has been a number of academics writing about this approach to patents – an approach that might be seen as focused on the theory of property more generally (as compared with just intellectual property).  The group includes Richard Epstein, Steve Haber, Troy Paredes (now on leave from this academic work), Henry Smith, Joseph Straus, David Teece, Polk Wagner, Josh Wright, and me (these folks listed so far have worked together on a range of recent works arising out of the Hoover Project on Commercializing Innovation), as well as Michael Abramowicz, John Duffy, and Adam Mossoff.  While a recent posting on Patently-O labels one of these folks listed here (me) as “conservative,” it is not clear what is meant by that term.  If the term is given its normal modern political meaning then it is curious to note that Charles Burson, Al Gore’s former Chief of Staff, co-authored one the recent opinion pieces I helped put together on patent reform, since it is not clear that he would fit that definition of the term.  Then again, this is an approach also advocated by President Carter and Jerome Frank, who also don’t easily fit the modern political use of the term conservative.  Put differently, the issues don’t break down nicely along mainstream political lines.  Nor do most people for that matter.  Nor do folks break down along lines of being pro patent or anti-patent.  These issues are more complex.  And so is any good academic. 

The most direct reason why it makes sense to go though all of this intellectual history, naming all of these names of folks who have written about the topics Michael explores (but in a different way than he does), is that Michael’s book does not seriously address any of them or their work.  Indeed, Michael has confirmed that his book doesn’t cite to or even mention most of these names or their work.  And the few times when he does mention some of them, it is in a very minor way, for propositions that are uncontroversial and different from the potential areas of debate they would have with him.  Two notable exceptions, which I appreciate, are Joseph Straus and me.   Michael mentions me once in a short catalog of different approaches to patent theory.  And while he does mention one or two of Joseph’s pieces that have discussed a lack of evidence of a patent hold up problem in the European biotechnology setting, and Michael seems to conclude in that section of his book that patents have posed less of a problem for basic science than some might have feared, he still concludes that “A few high-profile lawsuits against researchers would knock out the scaffolding currently supporting this precarious state of affairs.”  What is so precarious about this state of affairs and why would a few lawsuits disrupt it?  A few airlines crash once in a while and yet the airline sector still does business and people who elect for safety reasons to drive over taking commercial flights are generally not seen as acting in a sufficiently rational way to drive prudent policy on the issue.  Rather than trying to sit as a seemingly neutral judge weighing the empirical evidence Michael elects to discuss in this part of the book, a reader might want to know more about the reasons why patent hold up in this area is not a big issue (and why an “experimental” or “fair” use exception may be) and the book would have made a greater impact in this area if it had addressed more of that work. 

The bottom line is that while Michael has good reasons for not engaging the body of work discussed here, readers might like to at least know about the work, as well as the history, so that they can make up their own minds about these issues after due consideration of the range of views.  For those who are interested, much of it is available for free download on the web at www.innovation.hoover.org. 

A more indirect reason why it matters to consider these other views is that many of them apply a form of comparative institutional analysis generally associated with the field of New Institutional Economics.  In addition to taking seriously the transaction cost problems of property rights that underlie a big part of Michael’s analysis, this comparative approach also takes seriously the political economy problems that underlie how government actors will apply different decision-making rules.  Application of this comparative analytical framework highlights some of the complexities of the more flexible approaches Michael recommends in his book. 

For example, when it comes to dealing with the problem of bad patents (and there are many such patents – ones that don’t really meet the requirements for validity but have nonetheless been issued by the PTO), Michael endorses the currently-popular proposals for more flexible approaches to weeding out.  These proposals generally go by several names including “second window,” “opposition,” “reexamination,” etc.  In his words:

“An added bonus of the proposal would be its effect on antitrust. By providing a low-cost avenue to remove invalid patents, it would reduce the incidence of market power”

But as economists love to say, there is no such thing as a free lunch.  Faster and less financially expensive proceedings for policing bad patents are not without their costs.  The way they go faster and burn fewer dollars per hour in attorney time is that they allow an official actor, whether in the PTO or the courts, the flexibility and discretion to deny patents based on a subjective report about what was within the skill of those in the prior art, rather than the objective and more-fact-based inquiry into the contents and existence of actual laboratory notebooks, printed publications, and sample products which has been the rule since the 1952 Act. 

Flexibility sounds cool – who wants to be rigid? – but it has a significant Achilles heel.  Giving courts and examiners a pass from having to get the hard evidence that used to be required to prove invalidity over the prior art does not come without serious cost. Asking a decision maker to use her legal or technical expertise as the primary basis for her decision about what she thinks the state of the art was at a particular time in history gives her greater discretion than asking an ordinary jury whether a particular document or sample product existed at a particular time and what that document actually contains. By increasing the discretion of government bureaucrats, flexibility increases uncertainty, not decreases it, and it gives a built-in advantage to large companies with hefty lobbying and litigation budgets. That may be a big reason why some big firms want it, but what’s good for some big businesses is not always good for business overall.

Indeed, while much is made about the uncertainty of patents – it’s all the rage today – one of the central problems with many of the legal changes that Michael proposes is that these changes inject into the patent system a much greater uncertainty, and an uncertainty of a much more pernicious type.  Business can deal well with factual uncertainty – in fact many forms of business thrive on it (think options, futures, insurance, etc) – but the one type of uncertainty that is particularly bad for business overall is the uncertainty caused by having the underlying legal rules of the game enforced as a function of fashion and politics. But this is what you get when the enforcement mechanism (the details of the particular framework of the legal institutional design) are matters of flexible discretion. 

And to take things back to where they started, we have already run this experiment in this country.  The relevant legal framework for adjudicating patentability before the 1952 Act was that courts were asked to determine whether a patented invention constituted an “invention.”  A bit of a tautology.  And very flexible. 

The drafters of the 1952 Act did not think that the words “obviousness” and “nonobviousness” were any clearer, on their face.  But they picked these words precisely because they wanted to jettison the interpretive baggage associated with the old legal framework and create a new body of case law that focused on more objective factors. 

History can sometimes offer us some good ideas; and while we often like to emphasize the importance of invention, our efforts to re-invent our legal thinking in this area without the benefit of that historical wisdom may not play out so well. 

Geradin on Loyalty Rebates

Josh Wright —  24 September 2008

Damien Geradin has posted an interesting paper on “Separating Pro-competitive from Anti-competitive Loyalty Rebates: A Conceptual Framework.”  Here’s the (long) abstract:

In its submission to the recent OECD Roundtable on Bundled and Loyalty Discounts and Rebates (the “OECD Roundtable on rebates“), Korea observed that “loyalty discounts are getting growing attention both academically and practically” and that “this issue was now on top of the agendas of many seminars and workshops on competition law, with many papers devoted to the theme.” It then explained that this trend was attributable to the fact that loyalty discounts has become an important marketing tool, which raised several competition issues in the process.

While discounts or rebates – this paper will generally refer to rebates – have been used by businesses for centuries to sell greater amounts of products to customers, it is true that the compatibility of rebates with competition law has become a particularly acute issue in recent years. There are several reasons for this. These last few years have witnessed several major court judgments in the European Union (the “EU”) and the United States (the “US”), which have been abundantly commented upon, hence explaining the large number of papers and seminars devoted to the subject. But, more generally, the assessment of rebates seems to be one of the most unsettled areas of competition law.

In the EU, for instance, the decisional practice of the European Commission and the case-law of the Community courts have been harshly criticized as being unnecessarily strict, following a form-based approach that is poorly in line with economics. While these decisions have been sometimes misinterpreted, it is true that they were generally unhelpful in large part due to the fact they focused on the wrong questions. As a response to such criticisms (and more general criticisms about the manner in which Article 82 EC was implemented), the European Commission published in December 2005 a Discussion Paper, which promotes an effects-based approach to the assessment of rebates. While US courts have generally applied an effects-based approach to the assessment of rebates, the case-law is still unsettled, notably in the area of bundled rebates. This certainly led Korea to conclude its OECD submission by stating that “even in jurisdictions such as the US or the EU which have accumulated a considerable amount of enforcement experience regarding loyalty discounting often do not have a clear analysis method regarding this practice.”

While this observation is in many ways true, there are, however, encouraging signs that EU and US law are converging, and will increasingly do so, around a set of sound legal and economic principles to assess guidelines. Both the EU and the US contributions to the recent OECD Roundtable on rebates emphasize the importance of relying on objective economic criteria for the assessment of rebates. While the views of the European Commission and the US antitrust agencies still diverge on some issues, there seems to be a consensus that a price-cost test should play an important role in screening rebates that can (i.e., are able to) foreclose a dominant firms’ rivals to supply one or several customers. There is also a consensus that such tests should only be a component of a broader test that should also determine whether the rebates in question substantially foreclose the relevant market and, in such cases, whether the foreclosure effect can be compensated by efficiencies. While price-cost tests help determining whether the rebates granted can have the effect of foreclosing competitors because the dominant firm’s customers cannot turn to alternative suppliers without incurring substantial switching costs, it should also be demonstrated that these customers represent a substantial share of the market to which equally efficient rivals can turn, depriving them of the possibility to profitably enter and/or expand. Moreover, both EU and US law recognize the importance of taking into account in the assessment process the various efficiencies that can be generated by loyalty rebates and the extent to which they can counterbalance foreclosure effects.

Against this background, this paper aims at providing a framework – based on sound legal and economic principles – designed to help competition authorities and courts to separate pro-competitive loyalty rebates from anti-competitive ones. It starts with the widely acknowledged view that in the vast majority of cases dominant firms grant rebates to their customers for legitimate reasons, i.e. not to exclude competitors but to engage in legitimate forms of price competition and to realize a variety of efficiencies, as discussed below. In fact, rebates are not only used by dominant firms, but also by firms without any market power and thus unable to exclude competitors. This paper also takes as a starting point the view – which is recognized in the vast majority of antitrust regimes – that the goal of competition law is not the protection of competitors, but the protection of competition. Hence, rebates that cause less efficient firms to lose market share should not be banned as they lack anti-competitive effects. As will be seen below, these rebates enhance consumer welfare as they ensure that customers are served by the most efficient firms and benefit from their more competitive offers.

Global Competition Review recently sponsored a roundtable on FRAND commitments and their antitrust implications. The transcript is available here. It was moderated by Helen Jenkins (Oxera), and participants included Bernard Amory (Jones Day), George Cary (Cleary Gottlieb, advising Broadcom in its suit against Qualcomm), Damien Geradin (Howrey, advising Qualcomm), Matias Dewatripont (Universite Libre de Bruxelles), and Pat Treacy (Bristows).