January 12, 2013
Call For Papers: Searle Center on Law, Regulation, and Economic Growth Fourth Annual Conference on Internet Search, Northwestern University, Thursday, June 20, 2013 - Friday, June 21, 2013
Posted by D. Daniel Sokol
Call For Papers
Searle Center on Law, Regulation, and Economic Growth Fourth Annual Conference on Internet Search and Innovation
Northwestern University, Thursday, June 20, 2013 - Friday, June 21, 2013
The Searle Center on Law, Regulation, and Economic Growth is issuing a call for original research papers to be presented at the Fourth Annual Conference on Internet Search and Innovation. The conference will be held at the Northwestern University School of Law in Chicago, IL. The conference will run from approximately 9:00 A.M. on Thursday, June 20, 2013 to 3:00 P.M. on Friday, June 21, 2013. There will be a dinner reception and keynote address on Thursday night.
The conference is organized by Professor Daniel F. Spulber, Research Director, Searle Center on Law, Regulation, and Economic Growth and Elinor Hobbs Distinguished Professor of International Business, Professor of Management Strategy, Kellogg School of Management, and Professor of Law, Northwestern University School of Law (Courtesy).
GOAL: The goal of this conference is to provide a forum where economists and legal scholars can gather together with Northwestern's own distinguished faculty to present and discuss high-quality research relevant to Internet search and innovation. The conference will cover academic work on Internet search and innovation, and the discussion will examine related public policy issues in antitrust, regulation, and intellectual property.
TOPICS: Topics include:
- - Internet search and antitrust
- - Privacy issues in Internet search and marketing
- - Competition and barriers to entry in two-sided markets
- - Business method inventions and patents for Internet inventions
- - The Internet, innovation, and intellectual property
- - Market design, platforms, and e-commerce
- - R&D and innovation in high-tech
- - Open standards and entrepreneurship
- - Data portability
- - Cloud computing
- - Joint work in economics and computer science on search algorithms and other topics related to Internet search
PAPER SUBMISSION PROCEDURE: Papers for the conference should be submitted to the following email address: firstname.lastname@example.org
ATTENDANCE: Attendance for this conference is by invitation only. Potential attendees should indicate their interest in receiving an invitation by sending a message to Derek Gundersen at email@example.com
FUNDING: Authors will receive an honorarium of $1,500 per paper. The honorarium is intended to cover reasonable transportation expenses. Government employees and non-US residents may be reimbursed for travel expenses up to the honorarium amount. Authors are expected to attend and participate in the full duration of the conference. If more than one author attends the conference, the honorarium or travel reimbursement will be divided equally between the attending authors.
The Searle Center will make hotel reservations and pay for rooms for authors and discussants for the nights of Wednesday, June 19, 2013 and Thursday, June 20, 2013.
REVIEW PROCEDURE AND TIMELINE:
- Conference Papers Submission Deadline: Papers for the conference should be submitted to the following email address: firstname.lastname@example.org by February 7, 2013.
- Notification Deadline: Authors will be notified of decisions by February 25, 2013.
Potential attendees should send a message indicating their interest to Derek Gundersen at: email@example.com by June 17, 2013.
FURTHER INFORMATION: The conference is organized in cooperation with the Journal of Economics & Management Strategy (JEMS), which is edited by Daniel F. Spulber. JEMS encourages submissions on Internet search and innovation. Submissions are independent of the conference. Authors presenting papers at the conference need not submit to JEMS and are welcome to publish their work in other venues (with appropriate acknowledgement of the Searle Center). To submit to the Journal of Economics & Management Strategy, access ScholarOne at: http://mc.manuscriptcentral.com/jems
Papers prepared for the conference will be permanently hosted on the Searle Center website - http://www.law.northwestern.edu/searlecenter
The Searle Center on Law, Regulation, and Economic Growth at Northwestern University School of Law was established in 2006 to research how government regulation and interpretation of laws and regulations by the courts affect business and economic growth. Information on the Searle Center's activities may be found at: http://www.law.northwestern.edu/searlecenter
January 11, 2013
Distribution: Is Free-riding Bad After All?
Posted by D. Daniel Sokol
Greg Gundlach (University of North Florida) asks Distribution: Is Free-riding Bad After All?
ABSTRACT: Free riding is traditionnally invoked to justify the imposition of restrictions on distributors These restrictions are commonly accepted by antitrust authorities which consider that curbing the liberty of distributors will enhance efficiency In this paper, we put forward another view based on empirical data and demonstrating that free riding is common and not necessarily bad for any of the businesses involved
Towards a Regulation of the European Energy Sector through Commitment Procedures in Competition law? Some Lines of Enquiry
Posted by D. Daniel Sokol
Frederic Marty ((French National Centre of Scientific Research Fellow), Groupe de Recherche en Droit Economie et Gestion (Research Group on Law, Economics and Management) and UMR CNRS 7321 – Universite de Nice Sophia-Antipolis) brings us Towards a Regulation of the European Energy Sector through Commitment Procedures in Competition law? Some Lines of Enquiry.
ABSTRACT: The systematic use of commitments in the European energy sector competition case-law seems to achieve, through individual decisions, the Commission’s initial objectives of the Third Package negotiations. This article aims at analyzing to what extend antitrust remedies could go beyond the mere correction of abuses and could contribute to a regulation of competition. Judicial review, in terms of proportionality control, and the Commission’s degrees of freedom in negotiated procedures question not only competition policy and sector-specific regulation respective scopes but also European competition policy theoretical foundations.
Forum Shopping and Law Shopping in Competition Law Enforcement : Some Insights from the cases AMD v Intel (2000-2010)
Posted by D. Daniel Sokol
Frederic Marty ((French National Centre of Scientific Research Fellow), Groupe de Recherche en Droit Economie et Gestion (Research Group on Law, Economics and Management) and UMR CNRS 7321 – Universite de Nice Sophia-Antipolis) has posted Forum Shopping and Law Shopping in Competition Law Enforcement : Some Insights from the cases AMD v Intel (2000-2010).
ABSTRACT: A long-term litigation has opposed AMD to Intel, the dominant firm in the chips market. The first reproached the second pricing practices aiming at excluding it from the market on another basis than a competition on the merits. Intel was accused of implemented an anticompetitive strategy through its retroactive loyalty rebates, which incited PC constructors to accept tacit exclusive supply contracts. Our purpose does not consist in assessing the anticompetitive nature of such schemes or in evaluating to what extent they are detrimental to consumer welfare. We propose to consider the judicial strategy implemented by AMD. It lodged several complaints in numerous jurisdictions. Complaints were filled abroad (Japan, Republic of Korea, European Union), in some US States, before the Antitrust Division of the DoJ, before the FTC and through the private enforcement of the Sherman Act. Economic literature, especially the Chicago School, highlights, for ages, the risk of misuses of Antitrust Laws in order to impair competition. Such nuisance suits could take benefit from multiple, parallel of sequential complaints before different courts. Being successful in a first dispute before a more favorable or a less exigent (in terms of standard of proof) judicial arena could favor the plaintiff in a second trial or incite the defendant to accept to settle the dispute. Our paper analyzes the different between AMD and Intel in the perspective of such forum shopping strategies and tries to evaluate their consequences in terms of collective welfare.
January 10, 2013
Local Market Structure and Bank Competition: evidence from the Brazilian auto loan market
Posted by D. Daniel Sokol
Bruno Martins (Central Bank of Brazil) explores Local Market Structure and Bank Competition: evidence from the Brazilian auto loan market.
ABSTRACT: Asymmetric information and transportation costs incurred by borrowers may raise spatial price discrimination in bank lending. This paper exploits the large geographic dispersion in the market structure of the Brazilian banking sector to investigate the relationship between market concentration and bank competition. Local markets are also distinguished by the degree of barrier to entry in order to assess its effect on bank competitive behavior. The findings indicate a negative correlation between market concentration and bank competition and an even stronger effect in locations where the barriers to entry are higher. The paper also highlights the importance of evaluating the geographic impact of mergers and acquisitions for the analysis of the effect of market concentration on bank competition.
Tom W. Bell on Laws of Creation
Posted by Tom W. Bell
Laws of Creation, by Ronald A. Cass and Keith N. Hylton, offers a studied explanation of the various legal devices popularly styled as “intellectual property” or simply “IP”. In calm and lucid prose, it describes the policy ideals that do (or at least should) shape copyright, patent, trade secret, and trademark law. The Laws of Creation offers about as good a defense of the status quo as anyone could ask, and as such deserves to become a standard reference point in future debates about IP policy. This review of the book’s treatment of copyright aims to show, moreover, that Laws of Creation has much to teach us even when it fails.
Laws of Creation takes a soberly utilitarian approach to the question of whether we should recognize property rights in copyrights and other forms of IP. The text frankly admits that “little empirical evidence exists to shed light on the issues central to the design of intellectual property rights.” (P. 45). Rather than hard data, therefore, Laws of Creation seeks “the most plausible predictions respecting the operation of the law.” (P. 47). It applies this methodology—light on practice, heavy on theory—to conclude that “copyright law seems to provide a reasonable set of rules.” (P. 99).
On this and other points, the Laws of Creation shows admirable modesty. When in doubt, however, it tends to err on the side of making copyrights more powerful. With regard to copyright’s term, for instance, it suggests making a core set of rights last forever. (P. 124). In that, Laws of Creation goes beyond even what the Constitution would allow.
Whence comes this bias in favor of copyrights? It starts with the otherwise commendable presumption that “in most instances secure property rights with voluntary exchange provide the best prospect for enhancing wealth.” (p. 24). Laws of Creation frankly admits that expressive works, being non-excludable and non-rivalrous in consumption, differ fundamentally from tangibles such as land, cars, and apples. It nonetheless calls the whole lot “property,” a popular but misguided rhetorical move that evidently sways the analysis. If property is good, and copyright is property . . . the conclusion follows all too quickly.
Laws of Creation would do better to understand copyrights as a form of intellectual privilege. Seen in that light, copyright appears not as a type of property but instead as a limitation to it. Only thanks to a special statutory exception, after all, can copyright holders limit the rights we would otherwise enjoy to use our printing presses, computers, guitars, throats, and other tangible assets in echo of others’ expressions. To be pro-copyright is to be anti-property.
Various theoretical missteps also render Laws of Creation unduly sympathetic to copyright. For instance, it treats the expansion of international trade as little more than an occasion to worry about the prospect of copyright infringements abroad. Once lawmakers have calibrated copyright policy to provide sufficient incentives to supply domestic markets with expressive works, however, the opening of international markets—even ones with rampant piracy—threatens to overdo the icing on the cake. A more careful analysis would suggest that lawmakers reduce the power of copyright every time the size of the market for expressive works grows.
Laws of Creation similarly errs in focusing on how technological change might leave copyright holders worse off to the exclusion of focusing on what should be our ultimate concern: its impact on consumers. Advances in reproduction and distribution technology threaten to make copyrights less lucrative, of course, and should give us cause to worry about the incentives faced by would-be creators and publishers. Laws of Creation stops there, however, citing the wonders of the Internet only as an excuse for increasing copyright’s power. A more realistic and complete analysis would recognize that copyright holders might on net benefit from the lower costs and wider reach afforded by new technologies.
To get to the root of the issue, we should ask whether technological progress has made the consumers of copyrighted works worse off. Have recent years seen a reduction in the supply of original expressive works? Even though this, the most important question, nearly answers itself, Laws of Creation does not even ask it.
Most fundamentally, Laws of Creation evinces the sort of simple positivism, all too common in contemporary legal theory, in which legislation merits the same respect as the common law and in which natural rights matter not at all. Laws of Creation offers a wholly unsatisfying analysis of the public choice pressures that have afflicted copyright in recent decades, for instance, dismissing as “a recent phenomenon” (p. 214) the sort of legislation-by-lobbyists that by its own account has been going on for more than half a century. Remarkably, Laws of Creation expresses concern not that special interests have taken over the Copyright Act but instead that skepticism about the results might “become a powerful force that drives changes in those laws through the legislative process.” (P. 216.)
A more sophisticated approach would follow Friedrich A. Hayek, Bruno Leoni, Randy Barnett, and other classical liberal scholars in recognizing that property rights arise not grace of legislative fiat but as a spontaneous order. Property rights qualify as natural rights in that they are natural to human society—they alone allow us to live together in peace and prosperity. The common law process, at least in its traditional form (as opposed to merely litigation-driven interpretation of statutes), discovers the parameters our natural property rights through a decentralized and iterative process.
Copyrights, in contrast, are neither property rights nor common law rights, but instead arise only via legislated privileges. That is not to say copyrights are thereby unjustified; as with other government programs, the question is whether or not they produce a net public good. The answer to that question remains subject to great uncertainty, something that to its credit Laws of Creation fully recognizes. Laws of Creation should also recognize, however, that the way the law has created copyrights and other types of IP can tell us a great deal about their presumptive justification. The burden of proof should fall on those who advocate such legislative privileges in derogation of our natural and common law rights—a burden that Laws of Creation picks up, but does not fully carry.
Airport Privatization and International Competition
Posted by D. Daniel Sokol
Toshihiro Matsumura, University of Tokyo - Institute of Social Science and Noriaki Matsushima, Osaka University - Institute of Social and Economic Research describe Airport Privatization and International Competition.
ABSTRACT: We provide a simple theoretical model to explain the mechanism whereby the privatization of international airports can improve welfare. The model consists of a downstream (airline) duopoly with two inputs (landings at two airports) and two types of consumers. The airline companies compete internationally. We show that the outcome in which both airports are privatized is always an equilibrium, whereas that in which no airport is privatized is an equilibrium only if the degree of product differentiation is large. We also discuss airport congestion problems within the model framework.
Herb Hovenkamp on Laws of CreationPosted by Herbert Hovenkamp
In Laws of Creation: Property Rights in the World of Ideas, Ronald A. Cass and Keith N. Hylton provocatively discuss the relationship between competition policy and intellectual property rights, presenting a bird's eye view of how the antitrust laws and patent law do or should interact. While commentators have seen numerous actual or potential conflicts between IP and antitrust, Cass and Hylton believe that this tension "largely dissolves" when one considers the differences between static and dynamic costs, with antitrust focusing on the static and intellectual property law on the dynamic. This review examines that claim.
Most of Cass and Hylton's discussion of competition policy is related to problems of patent scope -- for example, the fact that a patent excludes, while antitrust generally abhors exclusion that results in lower market wide output. Patents can create structural monopoly (although most do not), and antitrust generally hates monopoly. They then focus on a short list of practices: setting a price, refusal to license, misuse including tying, reverse payment settlements, and collusion in the context of patent pooling.
Setting a price is a power inherent in nearly all property rights, including patent rights, and in any event unilateral price setting is not an antitrust violation in the United States either, not even when the firm is a monopolist. The only exception is predatory pricing, which is rarely proved and which concerns short run below cost prices rather than high ones. So there is no conflict here.
Cass and Hylton note that a simple refusal to license offends neither patent law nor antitrust law. However, they do not discuss more complex scenarios that test the boundaries of that proposition. For example, should there be a difference between acquired patents and internally developed patents? What of the dominant firm that acquires patents from nascent rivals for the purpose of keeping their technologies off the market, as in the Paper Bag case that the authors discuss? (Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908); compare the discussion in Bohannan and Hovenkamp, Creation Without Restraint: Promoting Liberty and Rivalry in Innovation 295-299 (2011)). And what of the firm that has established a course of dealing with rivals but then pulls the plug after the rivals’ market commitments have been made? United States antitrust law has found liability in such a case (Aspen Skiing), as did the EU in the Microsoft/server case.
Cass and Hylton briefly mention the Supreme Court's Walker Process doctrine (382 U.S. 172 (1965)), stating only its sixties' era version that enforcing a patent obtained by "fraud" can violate the antitrust laws. Through a long and rich history, nearly 1000 federal decisions have discussed the boundaries of Walker Process, which presents a relatively rare situation where antitrust reaches into the inner workings of the patent granting process, particularly in the Federal Circuit's development of the law of inequitable conduct.
I also found the two-paragraph discussion of patent ties, stating mainly that ties should be governed by the rule of reason, to be too thin in relation to the manifold practices and economic effects that are encompassed under that term. Historically, patent ties were condemned by both patent law and antitrust law even if they were not exclusionary, on the theory that the patentee could “leverage” a second monopoly on an unpatented tied good. See, e.g., Carbice, 283 U.S. 27 (1931) (patent law); and International Salt, 332 U.S. 392 (1947) (antitrust law). Cass and Hylton’s insistence on a rule of reason, with which I agree, very likely means that they would limit illegal tying to situations involving market foreclosure. But that still leaves a great deal of unexplored territory, including technological ties (Microsoft and Internet Explorer, Kodak’s Instamatic camera and film cartridge; Lexmark's printers and brand-specific print cartridges) and ties of unique aftermarket parts. They also do not address questions such as whether their rule of reason should be purely structural, addressing mainly market share and foreclosure percentages, or should it look to some other criterion, such as ability to exclude an equally efficient rival? In tying law, the tension between static and dynamic concerns is fairly obvious. If tying is profitable, then permitting it will induce more patenting by increasing the returns to doing so, at least in those situations where profitable tying is possible. Prohibiting it accordingly reduces those returns. In this case the statutes state that tying of goods "whether patented or unpatented" is unlawful, provided that the tie may substantially lessen competition (15 U.S.C. §14). This suggests a Congressional preference for the static concern, which is short run monopoly profits.
Reverse payments settlements, which Cass and Hylton discuss at some length, are a special creature of the Hatch-Waxman Act. Under that provision the first generic drug manufacturer to enter into competition with a pioneer manufacturer receives a limited period of exclusivity vis-a-vis other generics. Once the first generic is identified this creates a Coasean bilateral monopoly in which the joint maximizing outcome for the two parties, pioneer and generic, is typically to share the monopoly profit stream from the pioneer's drug rather than to compete against each other by pitting the generic's output against that of the pioneer. The generic manufacturer in particular can often earn much more by sharing the pioneer's market position than by producing in competition; as a result, its interests are a very poor surrogate for the public's.
For example, suppose manufacturing costs to both parties are 50 cents per unit. The monopoly price is 90 cents per unit. When the generic enters, if the two firms behave competitively the price will drop to 50 cents and they will each earn only a competitive return. By contrast, if they settle via a payment for delayed entry, the two firms will share the 40 cents in monopoly profits for a time, at consumers’ expense. The ironic result is that it is more profitable for the generic to settle than even to win the lawsuit outright, which would make the market competitive. The parties might of course achieve a similar result if the generic produced and the two firms colluded on the product price. The statute does not permit price collusion, however, and as a result it would be per se unlawful and perhaps even a criminal violation of the antitrust laws. So the Hatch-Waxman settlement somewhat resembles the story of two price-fixers who shut down one of their plants and produce the cartel output from the remaining plant.
Cass and Hylton see the settlements as frequently being devices for addressing the risk of a legal outcome that is unfavorable to the pioneer patentee, such as a finding of invalidity. That is the justification for most settlements of infringement cases: the patentee discounts the risk of losing the lawsuit into an agreement that typically includes a license to the infringer to produce at a specified royalty. One significant difference between the two is that this ordinary settlement is an output increasing event, making both patentee and licensee into producers, while a reverse payment settlement presumptively reduces output by preserving production only by the pioneer while raising its costs.
Cass and Hylton argue that patents in these cases are often valid and (about to be) infringed, citing data from Bessen and Meurer's Patent Failure (2008) which concludes that pharmaceutical patents are among the most durable and robust patents. While that is true, most Hatch-Waxman settlements are not on original pioneer molecules. They are typically on "evergreened" extension patents for new uses, new dosages, new forms of delivery, and the like. The failure rate of these patents is much higher, and the incentives to profit from the bilateral monopoly accordingly greater. Indeed, while the invalidity rate of litigated patents is an already-too-high 40%, the invalidity rate of pharmaceutical patents litigated under paragraph IV of the Hatch-Waxman process is nearly double that, 73% (FTC, Generic Drug Entry Prior to Patent Expiration (2002),, available at http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf. In the Watson Pharmaceuticals case on the Supreme Court's docket this term, the drug patent is on a particular gel formulation of a drug that was established and widely available but whose patent had expired. (FTC v. Watson Pharma, Inc., 677 F.3d 1298 (11th Cir. 2012), cert. granted, 2012 WL 4758105 (Dec. 7, 2012). Further, the formulation very likely did not meet patent law's novelty requirement. The drug itself was in the public domain, and gel formulations of drugs have been well known for decades. The delayed payments, which would run to more than $200 million over the course of the settlement agreement, were far larger than the generic could have anticipated by making competitively priced sales.
On collusion, Cass and Hylton focus mainly on patent pools and the differences between substitutes and complements. They conclude, as most of the literature has, that a patent pool of substitutes is more likely to be anticompetitive than a pool of complements. Once again, however, the devil is in the details. In the hypothetical case of a two-patent pool where each patent has a single claim, complements and substitutes may be relatively easy to distinguish. But pools today often include several thousand patents, and each of them has multiple claims. In that case one finds a range of pairwise relationships in nearly every pool, running from complements to substitutes. For example, in the Federal Circuit's Princo decision (616 F.3d 1318 (2010)) the licensed technology included an "analog" and a "digital" method for identifying locations on a recordable optical disc. One would ordinarily think of these methods as complements; that is, a manufacturer would choose one but not both. But in this case the analog method infringed at least one claim in the digital patent. To the extent one needed both patents to produce, the patents operated as both complements and substitutes. Over the century-long history of antitrust challenges to patent pools the complement/substitute distinction has been well known, but it has generally been of little use in identifying specific pools as anticompetitive.
Quite aside from the complements/substitutes issue, the real problem with the Harrow case (Bement v. National Harrow, 186 U.S. 70 (1902)), which Cass and Hylton use as a patent pool model, is not the technology sharing but rather the price fix. The defendants cross licensed their patents for producing spring tooth harrows but also set the product price. That price fixing agreement would be anticompetitive in most circumstances no matter whether the patents in question were substitutes or complements.
For example, suppose A has a patent on technology that enables an electric fan to oscillate up and down as well as side to side. B has a patent on technology that enables the fan to blow air in two directions at once, making oscillation unnecessary. These patents are substitutes, although it is possible that they are complements as well. That is, a fan maker that wanted to increase the directions of air flow would use one or the other, or perhaps both. Suppose A and B are both fan makers and that they cross license the patents to each other and fix the product price at $30, which is double the competitive price. The antitrust problem with this arrangement has nothing to do with the substitute/complement relationship of the patents. Rather, it is a function of the fact that A and B have "assigned" a value to their patents through the price fixing process that is equal to the entire available monopoly markup on the fans themselves. The fact is that many people might not want either of these technologies, or if they did want them they might be willing to pay slightly more than the competitive price, but certainly not the full difference between competitive and monopoly prices. Most patents, whether substitutes or complements, add much less value to a product than the difference between competitive and cartelized output, but the price fix permits the firms to capture that entire difference as the return on their patents.
It also seems clear that the ability to fix the price of patented goods is a dynamic inducement to patenting, because it increases the potential for patentees to obtain the full monopoly returns to their inventions, something that the patent act itself does not guarantee. So here the "dynamic" position (permit the price fix) and the "static" position (prevent it) are clearly in tension, and we need to make a further policy judgment about how to meter one against the other. Congress certainly could have decided this issue of patent scope by either explicitly permitting or explicitly prohibiting product price fixing of patented goods, as it did for tying, but it did neither. Under the Supreme Court's rule in United States v. General Electric, 272 U.S. 476 (1926), the hypothetical fan maker's price fix is probably lawful. Congress has never overruled the GE decision, but the Antitrust Division has consistently opposed it and sought to narrow its reach.
What Cass and Hylton say about patent law's focus on dynamic gains and antitrust law's focus on static gains is indeed true much of the time. But antitrust's common law approach to post-issuance patent restraints properly requires a great deal of focused, case-specific analysis in order to sort out the sheep from the goats. As the pooling illustration above indicates, the most fundamental difference between patent scope and antitrust scope is that patent law defines its scope in terms of property boundaries, with little thought about whether these boundaries create economic monopolies. For example, questions of infringement, claim construction, or even the doctrine of equivalents are addressed without reference to any economic market in which the patentee operates or the amount of market power that a particular outcome might produce. By contrast, post-issuance patent restraints are frequently intended to enable firms to create or prolong economic market power.
Indeed, the fact that patents do not create economic monopolies explains why there is so much room for antitrust law in cases involving patent practices. If patents did create monopoly power then there would be less opportunity to leverage even more monopoly by means of a restraint, at least not in the market in which the patent created the power. Antitrust acquires its role when the patentee seeks to obtain monopoly returns in an anticompetitive manner that the patent itself did not create and that the Patent Act does not authorize.
Cass and Hylton provocatively suggest that the tension between antitrust and patent law dissolves when one steps back far enough. They are also correct that the economic concerns of patent law are mainly dynamic, while the core concerns of antitrust are with static efficiency, principally competitive pricing. However, stepping back from the details impairs our ability to resolve specific disputes, and there is a large variety of them. Most cannot be resolved simply by naming the efficiency interests at stake.
Peter DiCola on Laws of Creation
Posted by Peter DiCola
Laws of Creation is an intervention. Authors Ronald Cass and Keith Hylton approach the subject of intellectual property (IP) law as outsiders. They are sophisticated and highly informed outsiders, to be sure, applying their collective expertise in fields like constitutional law, law and economics, tort law, antitrust law, and international trade. They have even published articles in IP and consulted on IP matters. But they come to IP as self-styled outsiders because they have a message for the insiders. Laws of Creation argues that most IP professors have gone too far in their criticisms of existing IP law. The authors make an “impassioned plea” (p. 220) that IP profs will come to see reason: IP law in the United Status is basically sensible and works well on the ground in the creative industries.
The authors’ persuasive goal, however, does not mean that the book is a polemic. Instead, the authors seek to demonstrate how a cost-benefit approach, implemented in as rigorous a way as practicality will allow, can rationalize most of the core doctrines of patent, trade secret, copyright, and trademark. Thus, the authors spend the bulk of the book outlining their particular methodology for analyzing IP and then showing readers what that methodology can do when applied to IP.
Cass and Hylton provide a clear explanation of the economics of IP in Chapter 3. This forms the backbone of the analysis to come. During their tour of various IP fields, the authors add other essential economic concepts, such as sequential innovation (in Chapter 4) and spillovers (in Chapter 6). The style of economic exposition is not technical. Even though the authors employ chalkboard economics (a.k.a. “applied theory”), there is no algebra. Instead, the authors describe the most relevant economic concepts and categorize them as either static or dynamic effects. The categorization is not novel, but the clarity of exposition is. And therein lies great value. In my teaching experience, other books on this topic have produced confusion and frustration. I would assign the basic law-and-economics passages of Laws of Creation to my students, particularly those who are new to law and economics, new to IP, or both. The discussion is even-handed between economic effects that reflect the benefits of IP protection and those that represent costs of IP protection. And because the authors are consistent in applying the categories of static effects and dynamic effects throughout the entire book, they have provided students with a good opportunity to understand the economic logic of how static and dynamic effects might fit together.
Four methodological or philosophical propositions form the intellectual core of the book. First, the authors argue (in Chapter 2) that cost-benefit analysis is superior to natural-law or rights-based approaches rooted in Locke or Kant. As a corollary, the authors note that cost-benefit analysis is most amenable to empirical analysis. Second, the authors acknowledge the relative dearth of empirical studies of IP, suggesting that it may result from the inherent limitations on social-science methods. Third, the authors advocate filling the empirical vacuum by applying cost-benefit analysis to whatever facts can be known about the creative industries. Fourth, the authors point to the economic and political success of the United States and the efficiency of the common law process as justifications for a policy presumption in favor of the legal status quo, which includes existing IP law and its core doctrines. Taken together, these four propositions lead the authors to engage in an extended exercise of rationalizing existing IP law. That is, the authors do not start from core principles and deduce the efficient legal doctrines for IP. Instead, the authors proceed inductively to justify many of the doctrines that exist. Occasionally, the authors criticize aspects of existing law, but in most such cases the provisions they criticize came from Congress rather than the courts.
The four propositions generate different points of departure for certain sets of readers. The Lockeans and Kantians might get off the bus at the first stop. Skeptics of cost-benefit analysis—those concerned with the problems of incommensurability across different values and different individuals—might stay on the bus for a while, but keep their coats on during the ride. Some readers might exit after the fourth proposition about the efficiency of free markets and the common law process. But I hope that all readers will stick with the book. My point is that the authors make their philosophical positions plain, but many of their positions will be controversial, as with any law-and-economics book.
To me, the core methodological question is whether the jump from the second proposition to the third—from the absence of conclusive empirical evidence to proceeding with cost-benefit analysis anyway—can be justified. I agree with the authors that one great attribute of cost-benefit analysis is that it calls for empirically based policy judgments. But Cass and Hylton sound a pessimistic note about empirical studies. They discuss the difficulty of even measuring many of the key economic variables (p. 45). So for them the shortage of empirical studies on IP presents a chronic problem, perhaps an impossible one. I don’t think the state of empirical IP is as bad as the authors suggest, whether in terms of existing studies or in terms of future prospects. Many researchers are trying to develop new empirical studies of IP, with various methods both quantitative and qualitative. But I take the authors’ point that empirical studies take time. And reaching a consensus on policy-relevant facts may take much longer, or never occur.
Cass and Hylton want to inform current policy and scholarly debates. They propose to forge ahead by applying cost-benefit analysis to basic facts about the creative industries, as opposed to measured quantities, survey evidence, or estimated relationships. For example, the authors assert that the courts’ secondary liability doctrine in Sony, Napster, and Grokster strikes an efficient balance between copyright owners and technology firms (pp. 118-121). The authors always explain that they’re just evaluating the broad strokes of the doctrine, not asserting perfect efficiency. But even this weaker claim cries out for evidence. How do we know that copyright’s secondary liability doctrines have not deterred socially desirable investments by Internet companies? On the other side, how do we know that Grokster’s inducement doctrine doesn’t leave copyright owners with insufficient enforcement tools?
In the case of secondary liability doctrine, courts usually do balance the goals of copyright enforcement and technological innovation. Thus, court opinions offer a way to rationalize them as seeking efficiency. But just because some attempt at balancing has occurred does not show that the balance is anywhere near optimal. Moreover, some of the philosophical force behind cost-benefit analysis is lost without an empirical foundation. If cost-benefit analysis amounts to tallying up impressions about whether a particular benefit seems large and a particular cost seems small, the method forfeits its advantages over the rights-based theories, no matter how careful the discussion.
Nonetheless, I found Chapter 6 on copyright law and the other chapters on particular areas of IP law to be challenging and engaging. The authors do not aim to provide a comprehensive review of every copyright doctrine; they just want to demonstrate the value of their methods. But they also provide a fresh perspective on well-traveled territory. I should emphasize that Cass and Hylton are not just taking the part of IP interests here. The authors are “pro-IP” in the sense that they think IP should exist. But their advocacy for the reasonableness of existing IP doctrine means that the authors support exceptions and limitations along with the rights, such as the public domain status of mathematical and physical formulas or the fair use doctrine.
I think the authors overestimate the distance between their policy preferences and those of most IP profs. Most of IP’s critics admire the wisdom of the traditional doctrines that Cass and Hylton defend—the rights and the limitations. Today’s debates are about perceived expansions from this accepted core. The authors take comfort whenever common law judges make new policy decisions. Their anti-alarmist view has some merit. I would point to the last decade’s cases on the DMCA safe harbor, in which many courts interpreted the statute broadly to protect companies from YouTube to Visa from secondary liability for online activities of users. But the heated debate among IP profs often concerns legislation or administrative action by the FCC, DOJ, Copyright Office, U.S. Trade Representative, or the executive branch’s “copyright czar.” Cass and Hylton actually seem to share most IP professors’ skepticism about congressional interventions into IP. They express skepticism about antitrust law’s contribution, although they don’t address other agencies. So the authors’ decision to portray most IP profs as dramatically wrongheaded puzzled me a bit. Why not just identify their differences with IP profs as one of emphasis—a glass-half-empty/glass-half-full problem? Laws of Creation could remind us of the wisdom of the core IP doctrines as a counterweight to despair, but still acknowledge the dangers presented by expanding IP too far or too little.
I think IP scholars will benefit from considering the strengths and weaknesses of Cass and Hylton’s cost-benefit methodolgy and from reconsidering whether the status quo. I found the authors’ critique from the outside of IP very interesting. Still, one could apply their own methodology to note that both outsider and insider perspectives have their costs and benefits. Even after reading and learning from Laws of Creation, I still think the insider perspective has the advantage and I remain concerned that IP law does not strike the correct balance.
Sean Seymore on Laws of Creation
Posted by Sean Seymore
In their new book Laws of Creation: Property Rights in a World of Ideas, Ronald Cass and Keith Hylton confront the debate that has developed within the field of intellectual property as to whether societal gains in increased inventive or creative activity as a result of IP rights are outweighed by the costs associated with protected intellectual products. Using a law and economics approach, the authors look closely at legal doctrines governing patent, copyright, trademark, and trade secret law and convincingly argue that they help create a landscape that inspires innovation and improves incentives for creativity. This post focuses on the patent law chapter.
From a law and economics perspective, patent law seeks to secure for society for benefits of innovation while at the same time minimizing unnecessary costs. The authors argue that various patent doctrines, particularly those related to patentability, have developed in order to strike the right balance.
The authors begin with patent-eligible subject matter. They immediately confront the issue of why we do not grant a patent to the first to discover a mathematical or physical formula. From an inducement perspective, the “out there already” and “scientific truth” explanations are insufficient because property law encourages the discovery of things already in existence. Indeed, the incentive to discover such formulae would be greater if the discoverer could collect money from those who use it. But the authors argue that formulae are unique because the costs of granting patents on them would exceed their innovation-promoting benefit. Given their broad spectrum of potential uses and the inability to determine a formula’s usefulness before completion of the research relying on it, “researchers will tend to be too reluctant, from society’s perspective, to pay for use of the formula.” (p. 53) In sum, patentability “would create a tax not only on research but on an array of related activities . . . .” (p. 54).
The authors then turn to the three basic criteria for patentability—novelty, nonobviousness, and utility. Novelty is easy to justify. Allowing patents on inventions that are identical to what is already known confer no benefit to society but impose monopolization costs. The authors rightly observe that if a patent is not needed as an inducement, the benefit of patent protection cannot be invoked as a justification for incurring the costs.
Nonobviousness is also easily justified. The issue is whether the invention—though not identical to what is already known—was within the technical grasp of a person having ordinary skill in the art at the time the invention was made. The inducement argument works here too because a patent is unnecessary since the invention will likely be introduced through ordinary technological progress. In such circumstances, “the cost of patent protection exceeds the likely benefit of encouraging innovation.” (p.67)
The third requirement is utility, which the authors justify on several grounds. They make a Brenner v. Manson argument that if the applicant cannot identify a well-defined and particular benefit to the public, “the costs of taxing future discovery and of monopolizing particular markets would seem to outweigh the benefit.” (p. 63) And to the extent that utility derails the patenting of fraudulent products and processes, the authors contend that the utility requirement reduces costs by enhancing the informational benefits of the patent system. While this is certainly consistent with traditional utility scholarship, there are credible arguments to the contrary. The abstract and imprecise nature of the term “useful” combined with the lack of objective criteria for assessing it make utility the most malleable patentability requirement. As a result, assessing utility can devolve into a subjective value judgment about when or if something should be patentable. History has shown that the Patent Office and courts have denied seemingly fraudulent inventions for a lack of utility when the invention had technical merit and actually worked as described. Society bears a cost when utility thwarts the entry of deserving inventions into the patent system.
I would have welcomed more attention to the enablement requirement, which is often said to lie at the heart of the quid pro quo between the inventor and society. Enablement compels an applicant to submit a disclosure sufficient to teach a person having ordinary skill in the art to make and use the full scope of the claimed invention without undue experimentation. The authors mention that enablement limits claim scope, but it does much more. It secures for society the benefit of innovation by ensuring that the applicant's disclosure will actually enrich public knowledge and that the public will get complete possession of the invention once the patent expires. Patent theory posits that the knowledge gained—which is available to the public as soon as a patent document publishes—will reduce R&D waste, stimulate others to design around the invention, and spur ideas for new ones. In addition, the requirement protects society against from the costs of granting an underserving monopoly which could create roadblocks for other inventors and hinder further innovation.
Overall the chapter provides an interesting overview of patent doctrines through the lens of law and economics. The authors have made a valuable contribution to the scholarly literature on patent theory.
Cass and Hylton, Laws of Creation: Property Rights in the World of Ideas Symposium
Posted by D. Daniel Sokol
Today we are hosting a symposium for the excellent new book Laws of Creation: Property Rights in the World of Ideas (Harvard University Press 2012) by Ron Cass (BU) and Keith Hylton (BU).
Symposium participants include:
Funmi Arewa (UC Irvine Law)
Tom Bell (Chapman Law)
Peter DiCola (Northwestern Law)
Herb Hovenkamp (Iowa)
Sean Seymore (Vanderbilt Law)
American Influences on EEC Competition Law: Two Paths, How Much Dependence?
Posted by D. Daniel Sokol
Mel Marquis European University Institute; University of Verona asks American Influences on EEC Competition Law: Two Paths, How Much Dependence?
ABSTRACT: Using historical and legal analysis, the authors investigate indicia of influence exerted by the US antitrust tradition on the early decades of the European experience with competition law and policy. With regard to policy discourse, the authors find essentially continuous transatlantic interaction and dialogue throughout the 1960s and 1970s. By contrast, EEC law as interpreted by the European Court of Justice appears to have developed along a more distinct trajectory. The US approach to monopolization did seem to influence intellectual constructions on Article 86 of the EEC Treaty. But within the Court of Justice the 'reception' of US-born ideas and their transposition in the context of Article 86 was not a direct but an indirect process. While the relative indifference of the Court in the relevant period is rather remarkable in light of the already-vast antitrust experience of the US, it is suggested that the reasons for the Court's approach are linked to an identity-building imperative and to the distinctive functions assigned to the law of the EEC and to its judges.
Competition Law of the United States
Posted by D. Daniel Sokol
Howard Langer (Langer Grogan & Diver) is the author of Competition Law of the United States.
BOOK ABSTRACT: Derived from the renowned multi-volume International Encyclopaedia of Laws, this practical analysis of competition law and its interpretation in the United States covers every aspect of the subject – the various forms of restrictive agreements and abuse of dominance prohibited by law and the rules on merger control; tests of illegality; filing obligations; administrative investigation and enforcement procedures; civil remedies and criminal penalties; and raising challenges to administrative decisions. Lawyers who handle transnational commercial transactions will appreciate the explanation of fundamental differences in procedure from one legal system to another, as well as the international aspects of competition law. Throughout the book, the treatment emphasizes enforcement, with relevant cases analysed where appropriate. An informative introductory chapter provides detailed information on the economic, legal, and historical background, including national and international sources, scope of application, an overview of substantive provisions and main notions, and a comprehensive description of the enforcement system including private enforcement. The book proceeds to a detailed analysis of substantive prohibitions, including cartels and other horizontal agreements, vertical restraints, the various types of abusive conduct by the dominant firms and the appraisal of concentrations, and then goes on to the administrative enforcement of competition law, with a focus on the antitrust authorities’ powers of investigation and the right of defence of suspected companies. This part also covers voluntary merger notifications and clearance decisions, as well as a description of the judicial review of administrative decisions. Its succinct yet scholarly nature, as well as the practical quality of the information it provides, make this book a valuable time-saving tool for business and legal professionals alike. Lawyers representing parties with interests in the United States will welcome this very useful guide, and academics and researchers will appreciate its value in the study of international and comparative competition law.
World Bank Consulting Job: Competition Policy Principles for Investment and Incentives Framework: An application to Special Economic Zones in Haiti
Posted by D. Daniel Sokol
Competition Policy Principles for Investment and Incentives Framework: An application to Special Economic Zones in Haiti
Publication Date 20-Dec-2012
Expression of Interest Deadline 16-Jan-2013 at 11:59:59 PM (EST)
Cartels As Rational Business Strategy: Crime Pays
Posted by D. Daniel Sokol
Robert H. Lande, University of Baltimore - School of Law and John M. Connor, Purdue University argue Cartels As Rational Business Strategy: Crime Pays.
ABSTRACT: This article is the first to analyze whether cartel sanctions are optimal. The conventional wisdom is that the current level of sanctions is adequate or excessive. The article demonstrates, however, that the combined level of current United States cartel sanctions is only 9% to 21% as large as it should be to protect potential victims of cartelization optimally. Consequently, the average level of United States anti-cartel sanctions should be approximately quintupled.
The United States imposes a diverse arsenal of sanctions against collusion: criminal fines and restitution payments for the firms involved and prison, house arrest and fines for the corporate officials involved. Both direct and indirect victims can sue for mandatory treble damages and attorney's fees. This multiplicity of sanctions has helped give rise to the strongly held - but until now never seriously examined - conventional wisdom in the antitrust field that these sanctions are not just adequate to deter collusion, but that they are excessive.
We analyze this issue using the standard optimal deterrence approach. This model is predicated upon the belief that corporations and individuals contemplating illegal collusion will be deterred only if expected rewards are less than expected costs, adjusted by the probability the illegal activity will be detected and sanctioned. To undertake this analysis we first calculate the expected rewards from cartelization using a new and unique database containing 75 cartel cases. We survey the literature to ascertain the probability cartels are detected and the probability detected cartels are sanctioned. We calculate the size of the sanctions involved for each case in our sample. These include corporate fines, individual fines, payouts in private damage actions, and the equivalent value (or disvalue) of imprisonment or house arrest for the individuals convicted.
Our analysis shows that, overall, United States' cartel sanctions are only 9% to 21% as large as they should be to protect potential victims of cartelization optimally. This means that, despite the existing sanctions, collusion remains a rational business strategy. Cartelization is a crime that on average pays. In fact, it pays very well. Accordingly, our concluding section suggests specific ways cartel sanctions should be increased to become more nearly optimal. This should save consumers many billions of dollars each year.
January 9, 2013
DOJ/PTO release joint policy statement on Standard Essential Patents
Posted by D. Daniel Sokol
The DOJ/PTO released a joint policy statement on Standard Essential Patents subject to F/RAND committments. See here.
Fordham Competition Law Institute Course in Summer 2013
Posted by D. Daniel Sokol
Fordham Competition Law Institute Course in Summer 2013
The Fordham Competition Law Institute’s training center for antitrust/competition law officials, judges and policymakers is pleased to announce its course offering for 2013. Since 2006, when FCLI started to offer summer courses, approximately 300 members of competition authorities and judges, representing more than 40 jurisdictions, have attended FCLI's workshops and courses. We look forward to another year of programs where a deeply experienced and world-caliber faculty will discuss advanced topics in competition law and economics with diverse groups of participants from competition authorities and courts in jurisdictions around the world.
If there are officials within your organization who are interested in attending the program described below, please provide them the information about the courses and/or send their name, a short resume, and application to Ms. Alice Wong at firstname.lastname@example.org Because space is limited, applications must be received by February 20, 2013.
Course for competition authority economists, June 24 to 28, FCLI will offer a one week course for economists from competition authorities, building on the success of previous economist courses. Through discussion and practical examples, the course will enable competition economists to refresh their knowledge of key economic concepts, learn about recent developments in economic theory, and develop the skills needed in case work. The course is open to competition authority economists with at least three years experience in an authority. A PhD in economics is not required.
A highly experienced, geographically diverse faculty from competition authorities, academia and the judiciary will lead the courses and workshop, taking an interactive approach and utilizing case studies. Sample detailed agendas and application is available on the FCLI website at www.fordhamantitrust.com
All programs will be held at Fordham Law School in New York City. Limited financial assistance will be available to enable competition officials and judges from diverse backgrounds to attend.
If you have any questions about the courses, please contact Ms. Alice Wong at email@example.com.
Would an Independent European Competition Agency Perform a Better Competition Policy?
Posted by D. Daniel Sokol
Oliver Budzinski Ilmenau University of Technology asks Would an Independent European Competition Agency Perform a Better Competition Policy?
ABSTRACT: This chapter discusses the independence of competition authorities and addresses the question whether an independent European competition authority would perform a better competition policy than the competition office of the European Commission, which is not independent but, instead, integral part of the European government. After summarizing the main general considerations, the chapter defines better competition policy simplifying as avoiding or solving three selected problems of contemporary European competition policy. It finds that two of these three problems are indeed likely to be not existent with an independent competition agency whereas the third problem is not likely to be better solvable by an independent body. Eventually, the chapter addresses a recent proposal to implement an independent Council of European Competition Advisors (CECA) that monitors and evaluates the performance of the European Commission’s competition division.
An Empirical Investigation of the Mergers Decision Process in Australia
Posted by D. Daniel Sokol
Robert V. Breunig, Australian National University, Research School of Social Sciences (RSSS) - Economics Program, Flavio M. Menezes, University of Queensland - School of Economics and Kelvin Jui Keng Tan University of Queensland - Business School undertake An Empirical Investigation of the Mergers Decision Process in Australia.
ABSTRACT: In this article, we examine a database assembled from an Australian public register of 553 merger decisions taken between March 2004 and July 2008. Mergers may be accepted without public assessment, accepted in conjunction with publication of a Public Competition Assessment, or rejected. The public register contains qualitative information about the reasons given by the regulator for each decision. We estimate an ordered probit model, using these three possible outcomes, with the objective of gaining a better insight into the regulator’s decision‐making process. Our two major findings are: (i) the existence of entry barriers and the existence of undertakings are highly correlated with the regulator’s decision to closely scrutinise a merger proposal; and (ii) if we compare two decisions, one which does not mention entry barriers (or import competition) with a decision that does mention entry barriers (or import competition), then the latter is significantly more likely to be opposed than the former.
Concurrence et Politique Industrielle: Analyse de Logiques Distinctes (Competition Policy and Industrial Policy: 'East is East, and West is West, and Never the Twain Shall Meet?')
Posted by D. Daniel Sokol
Fred Marty, Research Group on Law, Economics and Management offers his insights on Concurrence et Politique Industrielle: Analyse de Logiques Distinctes (Competition Policy and Industrial Policy: 'East is East, and West is West, and Never the Twain Shall Meet?').
ABSTRACT: French political debates on offshorings and the defense of national champions were a prelude to a "Great Fear" of deindustrialization. They spotlight the possible conflicts between competition and industrial policies. European competition law rules are often denunciated as obstructing the implementation of a national industrial policy. Our purpose in this paper is to analyze the links between these two public policies and to assess to what extent competition rules might preclude the implementation of such a policy. We underline that an implicit industrial policy might take shape through the enforcement of competition rules by the European Commission.