Monday, October 21, 2013
Yossi Spiegel, Tel Aviv University - The Leon Recanati Graduate School of Business Administration discusses Backward Integration, Forward Integration, and Vertical Foreclosure.
ABSTRACT: I show that partial vertical integration may either alleviates or exacerbate the concern for vertical foreclosure relative to full vertical integration and I examine its implications for consumer welfare.
ABA Section of Intellectual Property Antitrust Interface with Intellectual Property Law Committee
In cooperation with
IP Section Transaction and Licensing CommitteeIP Section Patent Litigation Committee
ABA Section of Antitrust Law Intellectual Property Committee
ABA Section of International Law Antitrust Committee
FRAND in Asia
November 11, 2013
10:00 – 11:00 am ET
FRAND commitments have been at the cutting edge of practice globally in the antitrust-intellectual property interface. This tele-seminar will address hot topics on FRAND in Asia with law firm, in house and economics practitioners as well as academic perspectives.
- Elizabeth Xiao-Ru Wang, Principal – CRA, Boston, MA
- Adrian Emch, Partner - Hogan Lovells, Beijing, China
- Greg Sivinski, Assistant General Counsel Antitrust - Microsoft, Redmond,
- Haksoo Ko, Seoul National University, Seoul, Republic of Korea
Kate Ho (Columbia) and Robin S. Lee (NYU) discuss Insurer Competition and Negotiated Hospital Prices.
ABSTRACT: We examine the impact of increased health insurer competition on negotiated hospital prices. Insurer competition can lead to lower premiums and reduced industry surplus, thereby depressing hospital prices; however, hospitals may also leverage fiercer insurer competition when bargaining in order to negotiate higher prices. We rely on a theoretical bargaining model to derive a regression equation relating negotiated prices to the degree of insurer competition, and use the presence of Kaiser Permanente in a hospital's market as a measure of insurer competition. We estimate a model of consumer demand for hospitals and use it to derive many of the other independent variables specified in the regression equation. Leveraging a unique dataset on negotiated prices between hospitals and commercial insurers in California in 2004, we find that increased insurer competition reduces hospital prices on average, but has a positive and empirically meaningful effect on the prices of attractive and high utility generating hospitals. This heterogeneous effect across hospitals—which has not been emphasized in the recent literature on hospital-insurer bargaining—provides incentives for hospital investment and consolidation, and implies that hospital market power can lead to high input prices even in markets where many insurers are present.
John D. Harkrider (Axinn, Veltrop & Harkrider LLP) advocates REPs Not SEPs: A Reasonable and Non-Discriminatory Approach to Licensing Commitments.
ABSTRACT: A lot of ink has been spilled on the subject of RAND commitments in recent years. Lawyers and judges have offered opinions on the proper methodology for calculating RAND royalties, regulators have sought to clarify the circumstances under which pursuing injunctive relief comports with a RAND commitment and competition law, and academics have suggested frameworks for arbitrating RAND license disputes. Seemingly everyone has extolled the virtuous role that RAND commitments play in fostering industry standards and interoperability and condemned the opportunistic breach of such commitments.Much of that analysis and discussion, however, has been unduly narrow, with commentators focusing on RAND commitments made to formal, collaborative standard-setting organizations and which encumber so-called standard-essential patents. Indeed, much of the discussion has focused on the even narrower subset of SEPs related to smartphones and other wireless technology. Yet SEPs are merely a subset of the larger category of patents that are encumbered by RAND commitments, and patentees make such commitments in a variety of settings-not just in the context of formal SSO standard-setting efforts. In whatever setting they are made, RAND commitments serve the same purpose: to encourage firms to adopt the underlying patented technology-either on a standalone basis or as incorporated into a standard-by assuring them that they will not be subject to unreasonable licensing demands or other types of "hold-up." The reasons for condemning the breach of such commitments, in turn, also depend on the effect on injured implementers, not on the institutional context in which the promises were originally made. For some, the failure to consider non-SSO RAND commitments in their analysis of the issue is likely unintentional. Many of the recent RAND disputes that have prompted commentary, lawsuits, and enforcement actions have involved formal SSOs and SEPs, so it is perfectly understandable that some discussions would restrict themselves to that arena. Other commentators, however, have suggested that concerns over RAND commitments are fundamentally unique to SSOs because of the collective nature of institutionalized standard-setting. That conclusion, however, misunderstands the underlying antitrust principles at stake. Simply put, there is no legal or economic reason to discriminate between a RAND commitment made to an SSO and a RAND commitment made to an industry at large. In either case, what matters is the effect that commitment has on encouraging industry adoption of the underlying patented technology. And if we are concerned about the wrongful acquisition of market power, it is important to recognize that both RAND commitments made unilaterally and RAND commitments made as part of collective SSO activities can induce industry adoption and confer market power on the underlying technology. On the other hand, there may also be SSO-developed standards that themselves face competition, such that even the right to entirely exclude others from practicing the standard would not confer a substantial degree of market power. Assessing whether a breach of a RAND commitment is anticompetitive, therefore, requires a case-by-case inquiry and the mere presence or absence of an SSO on its own does not reveal very much. A broader understanding of the contractual and competitive importance of both SSO and non-SSO RAND commitments will not just promote doctrinal coherence, it will have salutary practical effects as well. By establishing general rules that at least presumptively govern all RAND commitments, it will make clear to stakeholders that RAND commitments carry with them a predictable set of norms and obligations. That, in turn, will help RAND commitments achieve their principal purpose: encouraging the development and adoption of new technologies by assuring both innovators and implementers that neither will exploit the other.
Aaron S. Edlin, University of California at Berkeley; National Bureau of Economic Research (NBER), C. Scott Hemphill, Columbia University - Law School, Herbert J. Hovenkamp, University of Iowa - College of Law and Carl Shapiro, University of California, Berkeley - Haas School of Business are Activating Actavis.
ABSTRACT: In Federal Trade Commission v. Actavis, Inc., the Supreme Court at last provided fundamental guidance about how courts should handle antitrust challenges to reverse payment patent settlements. The Court came down strongly in favor of an antitrust solution to the problem, concluding that “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed.” At the same time, Justice Breyer’s majority opinion acknowledged that the Court did not answer every relevant question. The opinion closed by “leav[ing] to the lower courts the structuring of the present rule-of-reason antitrust litigation.”
This article is an effort to help courts and counsel fill in the gaps. We identify and operationalize the essential features of the Court’s analysis. We describe the elements of a plaintiff’s affirmative case and justifications that may be offered by defendants. For private cases, we outline an appropriate procedure for evaluating damages and suggest specific jury instructions.
Sunday, October 20, 2013
Litigating EU Competition Law Issues before Arbitrators and Judges - Rome,
8 November 2013 08.30 to 18.00
Organisers Roberto Cisotta and Mel Marquis
Conference program attached
Sean Gates (MoFo) describes Standard-Essential Patents and Antitrust: Of Fighting Ships and Frankenstein Monsters.
ABSTRACT: Standard-essential patents have been at the heart of a debate about the reach of U.S. antitrust law. In recent years, the focus has been on whether breach of a good faith commitment to license on reasonable and non-discriminatory terms can be the basis for a monopolization claim. The question is whether, in the absence of any fraud or deception at the time of the RAND commitment, an antitrust violation occurs when a holder of a RAND-encumbered patent either refuses to grant a license on RAND terms or seeks injunctive relief.In consent decrees, the Federal Trade Commission has stated that such conduct may violate Section 5 of the FTC Act as an unfair method of competition. But no court has ruled on such a theory. And the Commission has been careful to distinguish between Section 5, which only the FTC can enforce, and Section 2 of the Sherman Act, which the Department of Justice and private litigants may enforce. Whether a breach of a RAND commitment may be a violation of Section 2 thus remains open to debate. But recent patent law developments may undermine any Section 2 theory. And breach of a RAND commitment as a Section 2 violation may face a difficult legal path in any event. The time may have thus come to talk of other things, such as outsourcing patent enforcement by operating companies to patent assertion entities. Some have complained that such arrangements may violate the antitrust laws. If the theory gains any traction, such outsourcing may become like the fighting ships of shipping conference lore or the Frankenstein monsters of raising rivals' costs theory.
Saturday, October 19, 2013
Steve Salop (Georgetown) explains Guiding Section 5: Comments on the Commissioners.
ABSTRACT: FTC Commissioners Joshua Wright and Maureen Ohlhausen have proposed that the Commission adopt Guidelines for the application of Section 5 to Unfair Methods of Competition ("UMC"). These UMC Guidelines would apply to non-merger conduct that may not violate the Sherman Act. Agency Guidelines can provide a useful role in defining the scope of agency enforcement intentions and providing guidance to the business community, outside counsel, and agency staff. They also can lead to more refined legal standards. This short note will comment on the role of Section 5 distinct from the Sherman Act and how this relates to the Commissioners' proposed Guidelines.
Friday, October 18, 2013
Submissions are being accepted for the best published academic paper
The Award Committee shall base its award decision on the paper's excellence
The first place winner will receive an award in the amount of $8,000.
A maximum of two runners-up may be awarded an amount of $3,000 each.
Qualifications & How to Enter
Papers must meet the following requirements:
- Address the subject of retrospective examination of the outcomes of merger
- Include empirical analysis of post-decision data.
- Cover enforcement decisions in any jurisdiction having a governmental
- Be in the English language
- Published or accepted for publication on or after January 1, 2012.
To enter, please send one copy of the article
Yannis Karagiannis, Institut Barcelona d'Estudis Internacionals - IBEI explains The Causes and Consequences of the Collegial Implementation of European Competition Law.
ABSTRACT: A major achievement of the new institutionalism is the formalisation of the idea that certain policies, such as competition law, are more efficient when administered by a politically independent organisation. Based on this insight, several practitioners and scholars criticise the European Community for relying too much on a multitask, collegial, and therefore politicised organisation, the European Commission. Defining collegiality as the involvement of non‐expert commissioners in the implementation of the EC competition law, this article offers the first interdisciplinary analysis of the causes and consequences of that peculiar European institution. The central finding is that, far from being a mistake or the product of unanticipated consequences, collegiality was a necessary condition for the creation of supranational European law.
Call for Papers: Third ABA/NYU Next Generation (Junior Professor) Antitrust Scholars Conference - Friday, January 17, 2014
Christoph Engel Max Planck Institute for Research on Collective Goods; University of Bonn - Faculty of Law & Economics; Universitat Osnabruck - Faculty of Law and Axel Ockenfels, University of Cologne - Department of Economics discuss Maverick – Making Sense of a Conjecture of Antitrust Policy in the Lab.
ABSTRACT: Antitrust authorities all over the world are concerned if a particularly aggressive competitor, a "maverick", is bought out of the market. One plausible determinant of acting as a maverick is behavioral: the maverick derives utility from acting competitively. We test this conjecture in the lab. In a pretest, we classify participants by their social value orientation. Individuals who are rivalistic in an allocation task indeed bid more aggressively in a laboratory oligopoly market. Yet we also observe that the suppliers' willingness to pay to buy the maverick out of the market is much smaller than the gain from doing so. Again, rivalry contributes to the phenomenon: a supplier who buys out the maverick would fall behind the remaining competitor in terms of profits, which does not seem acceptable to most suppliers.
Bengt Domeij, Uppsala University - Faculty of Law Anticompetitive explores Marketing in the Context of Pharmaceutical Switching in Europe.
ABSTRACT: The article deals with the intersection between competition law rules on abuse of a dominant position and switching strategies employed by pharmaceutical originator companies. Switching is also known as ever-greening, product hopping or product life cycle strategies. It is one of the most topical issues in the patent-antitrust intersection today and consists in launching a slightly modified, second generation pharmaceutical, 1-2 years before the patent exclusivity expires for a first generation product. In this window originators try to migrate patients to a reformulated product. If successful, this will shield the originator from the effects of generic substitution for the first generation product. In the AstraZeneca-case the EU General Court held that a selective redrawal of marketing authorizations for a first generation product was an abuse of a dominant position under article 102 TFEU. This article focuses on other components in a switching strategy, especially the timing and content of marketing efforts by an originator company. Marketing is pro-competitive in almost all cases, but due to the special regulatory context in the pharmaceutical industry, marketing by an originator company can be used in an excluding fashion in the pharmaceutical industry. The conclusion is reached that casting the quality or price of the originator’s first generation product in a bad light, in comparison with the second generation product during exclusivity for the first generation product, may be an abuse by a dominant firm falling foul of article 102 TFEU. It is in effect equivalent to negative comparative advertising messages concerning a competitor’s soon to be launched product.
Thursday, October 17, 2013
We had five blog posts on the hot topic of non-SSO Patent Commitments and Pledges. I believe that this is the next frontier in the FRAND wars.
- David Balto wrote about situations where a firm makes general non-SSO FRAND-like commitments and antitrust issues that arise under such circumstances. He even provided an example of where this might be happening.
- Logan Breed described how non-SSO Patent lock-in and opportunism occurs.
- Jorge Contreras analyzed the legal ambiguity involving non-SSO commitments.He argued that the contractarian approach is flawed and instead suggested an approach based on market reliance under securities law (think back to law school days and Basic v. Levinson). He also provided an excellent tool. Program on Information Justice and Intellectual Property (PIJIP) at American University’s Washington College of Law has established a new public web resource listing and describing non-SDO patent commitments.
- Robert Harris discussed de facto standards-essential patents and situations involving when a firm with market power in one or more product markets uses that market power to establish a de facto interoperability or compatibility standard for the industry.
- Simon Steel analyzed some historical perspectives in this area and then applied these insights to the present.
This symposium was sponsored by Google. When initially posted, the symposium inadvertently did not include sponsorship information.
Posted by Simon Steel (Harkins Cunningham LLP)
RAND Obligations Outside the SSO Setting: Some Perspectives from History and Analogy
In the standards-rich, networked economy of the twenty-first century, there is a natural tendency to think of commitments to standard-setting organizations (SSOs) as the main basis, and the model, for obligations to license patents on reasonable and non-discriminatory (RAND or FRAND) terms. But it was not always so. A look back at the history of RAND licensing obligations in twentieth century patent/antitrust cases offers a broader perspective, and suggests responses to some objections to enforcement of RAND obligations outside the SSO context.
However, while the old cases legitimize RAND as a workable antitrust remedy, they are less helpful when it comes to when and how strongly a voluntary commitment should be enforced. Other contributors to these debates, including in this symposium, have tackled these issues at the level of antitrust, IP, patent misuse and contract doctrine. In this piece, I will skip the doctrine and offer an analogy from the world of real property to suggest what an ideal resolution (which would likely require legislation) might look like.
Twentieth Century Patent RAND
RAND patent licensing obligations are not a new innovation by SSOs; they are a remedy that has been used for various purposes in antitrust cases fairly regularly for over 60 years. In 6 separate cases in the 1950s, federal courts upheld antitrust consent orders imposing “reasonable and non-discriminatory” licensing obligations on patentees alleged by DOJ to have divided or otherwise controlled product markets by means of restrictive provisions in patent licensing or pooling agreements. RAND (and other) compulsory licensing obligations were also imposed over objections in a fully litigated case, the GE lamps case, as a means, less restrictive than divestiture, to restore competition to markets harmed by patent-based tying, and in a private action, the glass tempering case, . The substantive antitrust liability theories at play in some of these cases might seem questionable today in light of the modern contraction of per se liability and modern understandings of the procompetitive benefits of patent pools and vertical restraints, but RAND obligations were clearly a common, established remedy for patent licensing practices viewed as anticompetitive. As the Supreme Court confirmed in 1974, RAND licensing requirements are “well-established forms of relief when necessary to an effective remedy, particularly where patents have provided the leverage for or have contributed to the antitrust violation alleged.” None of the early cases concerned the enforcement of a prior RAND licensing commitment, whether to a SSO or to someone else. But the lack of such a commitment did not stop DOJ, the courts and the consenting defendants from adopting RAND as an antitrust remedy. Moreover, vague as the phrase “reasonable and non-discriminatory” may seem in the abstract, it seems in practice to have provided sufficient clarity to guide negotiations, since there is no reported subsequent adjudication on the meaning or application of that phrase in any of the 1950s cases. And DOJ, with the courts’ approval, constructed a more or less standard apparatus to deal with any disputes that might arise: (1) if the “reasonable” level of royalty was disputed, the patentee could apply to the court that imposed the RAND obligation for a “reasonable” royalty determination, as to which the patentee would have the burden of proof in a proceeding in which the potential licensee and DOJ would also be heard; and (2) having requested a license, the potential licensee could proceed pending royalty determination as if licensed, with the court having discretion to impose interim royalties and to require retroactive payment of royalties once determined.
DOJ and the courts got more specific about the meaning of RAND in the following decades. For example, in a 1969 case, DOJ brought a section 1 case against 3M for abusive patent infringement litigation coupled with territorial and other restrictions on licensees, resulting in a RAND licensing consent order that specified that licenses must be non-exclusive and “non-discriminatory as among licensees procuring the same rights under the same patents,” and with a detailed procedure that re-appeared in subsequent DOJ consents: a 30-day deadline for the patentee to respond to license requests with proposed royalties; 120 days for the parties to negotiate royalties; freedom thereafter for either party to apply to the court for royalty determination, with the burden being on the patentee; a right for the applicant to practice the patent in the interim, subject to interim and retroactive royalties set by the court; and any judgment as to reasonable royalty in one case being binding in future cases on the same patent. The 1975 Manufacturers Aircraft consent added a further wrinkle: the RAND licensing obligation imposed there was subject to a condition that any applicant for a RAND license from the defendants which itself had a patent in the same area must make a reciprocal offer of RAND licensing. And on remand in the Glaxo case in 1974, the district court added to the now-standard RAND provisions a clause prohibiting the defendant from transferring the patents at issue other than with a binding promise from the transferee to be bound by the RAND commitment.
Meanwhile, RAND also acquired legitimacy and substance in the courts as a substantive basis for finding patent misuse. In the 1959 ASC glass tempering case, the Third Circuit held that compulsory package licensing – refusing to license one patent on its own, rather than as part of a packaged patent portfolio license – both violated a prior court order imposing RAND obligations and constituted patent misuse. In the 1969 Uniroyal case, the Southern District of New York relied on the RAND concept in holding that a patentee with a patent monopoly on the use of an unpatented type of weedkiller was guilty of patent misuse when it used that patent to monopolize the product market by refusing to license other manufacturers, or users who bought the product from other manufacturers, under the use patent, other than at royalty rates so high relative to Uniroyal’s product price that product competition was foreclosed.
Where does this twentieth century history take us in the end? Individual cases do not take us very far, particularly insofar as they rest on per se liability theories and broad notions of patent misuse that may not survive modern precedents such as Princo. But collectively, twentieth century history does establish that RAND orders have long been a recognized antitrust remedy outside any SSO context; that courts can construct simple and consistent rules and procedures for judicial resolution of any disputes about the meaning and implementation of RAND; that courts can and have specified what their RAND orders require with respect to such issues as preventing evasion by transfer of patents, barring compulsory package licensing, and barring royalty rates that foreclose competition; and that, in practice, judicial guidance on RAND outside the SSO context has typically been sufficient to avert the need for the parties to return to court.
A RAND Commitment Registry – An Idea Derived from Real Property Analogies The twentieth century patent-RAND history provides support for RAND enforcement against several potential objections. No, RAND is not a special SSO thing. Yes, it is an established antitrust remedy. Yes, courts can enforce and specify it. And no, it is not so indefinite as to guarantee endless insoluble litigation about its meaning.
The problems that remain concern RAND commitments: whether, to what extent, for and against whom, and how they should be enforced. Under section 1 of the Sherman Act, bait and switch tactics to exploit lock-in, such as promising RAND licensing to lure market participants into adopting your standard, and then reneging, should qualify as exclusionary conduct that will lead to liability if the requisite monopoly or danger of monopoly is shown; and section 5 of the FTC Act and unfair competition law may offer enforcement prospects when monopolization cannot be shown. And contract and promissory estoppel doctrine can also provide a basis for enforcement of RAND commitments, especially (but not only) when there is an obvious relationship between the parties, as between members of an SSO.
However, while there are strong grounds for antitrust or contractual enforcement in most if not all cases of a dishonored RAND commitment, such enforcement can be complex and does not seem to capture the basic reality. Assuming that it is a real commitment, and not just puffery, a firm that makes a RAND commitment is making a specific promise to the world at large about how it will use a specific item or items of property. And, whether it does so in order to enjoy the benefits of membership of an SSO, or in order to persuade an SSO to adopt its technology as a standard, or in order to persuade the market, outside an SSO, to adopt its technology as a standard or platform, or in order to persuade antitrust enforcers to permit a merger or close an investigation, or in order to win goodwill from developers, open software advocates or politicians, it is generally doing so to gain a substantial commercial advantage based on public trust that it will honor its commitment.
In assessing whether and how such a commitment should be enforced, complex after the fact inquiry into market power, contractual relationships or individual reliance makes little policy sense. When a legal proceeding is about damages, causal and relationship issues are rightly central. But a RAND dispute is generally about specific performance. (An “efficient breach” theory of why damages should substitute for injunctive relief seems implausible where the injunctive relief takes the form of compelling a reasonable exchange.) If a commitment is serious and clear enough to merit enforcement, and it was made with an expectation of significant commercial benefit, it makes sense to enforce it.
This suggests that what would be desirable, if we could escape doctrinal tangles, is a regimen that determines clearly ex ante what the content and scope of a given RAND commitment is, that distinguishes clearly between serious commitments and puffery, without relying on arbitrary distinctions between SSO and non-SSO commitments, that is simple and predictable for both the committing party and the potential licensee as to how the commitment will be interpreted and enforced, that allows parties to frame their RAND commitments, and SSOs to frame their rules as to RAND commitments, as they wish, so long as they are clear, that makes RAND commitments publicly available and clear, and that offers a simple, central enforcement mechanism. What would such a system look like? My suggestion is that it would not be a system that relies on varying state law rules of contract and promissory estoppel, on antitrust enforcement discretion, or on complex, fact-intensive private antitrust trials. It would not create opportunities for forum-shopping, and it would not place the burden on the public, or on excellent public interest efforts such as the American University effort described in Jorge Contreras’s comment, to find, catalog and track RAND commitments. Nor would it be a system that creates opportunities for evasion by separating the data on the commitment from the data on the patent, which the committer may have transferred to a third party.
Rather, my suggestion is that the ideal system for dealing with patent RAND commitments going forward would be one administered centrally by the PTO and modeled loosely on real property title registries. RAND commitments to the general public are akin to public rights-of-way or other easements over real property: they are encumbrances, in favor of the general public, on the property. And, just as the scope and validity of an easement on real property is efficiently and publicly settled by appending it, delineated however the property owner consents it to be delineated, to the record of title for the underlying realty at the local property registry, an official, conclusive (apart from fraudulent registration) documentation of a RAND commitment could, with appropriate legal authorization, be appended to the record of the patents it encumbers at the PTO. Moreover, that federal registration could be made the basis for a federal cause of action to enforce RAND commitments which could be channeled into appeals to the Federal Circuit, thus minimizing forum-shopping and facilitating the development of coherent and predictable doctrine interpreting RAND commitments.
There are many possible objections to this suggestion – not least that it would likely require legislation and extra funding for the PTO, which could be politically difficult. But the expense of centralized title registration has long been proven worthwhile for real property, and it is at least as important to provide clarity with respect to rights to patents – particularly patents important enough to be subject to public RAND commitments. There would, of course, be transitional problems with respect to patents already subject to RAND commitments, and the formality and transaction costs (including costs of determining precisely which in a large portfolio of patents are included in a general RAND commitment) could deter some RAND committers from registering. Ultimately, however, honest RAND committers will commit if the benefit of committing outweighs the cost, and strengthening, publicizing and clarifying the commitment by means of a PTO record should generally enhance any net positive value of a RAND commitment. And the market could learn to devalue – and SSOs and antitrust enforcers could amend their rules and practices to deem insufficient – unregistered RAND commitments.
This suggestion may or may not ultimately feasible, and the devil would be in the details if it is. But in an area strewn with complex overlapping IP, antitrust and contract doctrine, stepping back to look at broader analogies, and trying to imagine what an ideal regime would look like, seems like a worthwhile project.
Alberto Galasso, University of Toronto - Rotman School of Management, Matthew F. Mitchell, Rotman School of Management and Gabor Virag, Rotman School of Management discuss Market Outcomes and Dynamic Patent Buyouts.
ABSTRACT: Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify alternatives to patents that could lower prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government's innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent's life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives.
Pehr-Johan Norback, Research Institute of Industrial Economics (IFN), Lars Persson, Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR) and Joacim Tag, Research Institute of Industrial Economics (IFN) describe Acquisitions, Entry, and Innovation in Network Industries.
ABSTRACT: In industries with network effects, incumbents installed bases create barriers to entry that discourage entrepreneurs from developing new innovations. Yet, entry is not the only commercialization route for entrepreneurs. We show that the option of selling to an incumbent increases innovation incentives for entrepreneurs when network effects are strong and incumbents compete to preemptively acquire innovations. We thus establish that network effects and installed bases do not necessarily restrict innovation incentives. We also show that network effects promote acquisitions over entry and that the entrepreneur has strong incentives to invest in the initial user base of the innovation.
Lapo Filistrucchi (CentER, TILEC, Tilburg University and Department of Economics, University of Florence) and Tobias J. Klein (CentER, TILEC, Tilburg University) discuss Price Competition in Two-Sided Markets with Heterogeneous Consumers and Network Effects.
ABSTRACT: We model a two-sided market with heterogeneous customers and two heterogeneous network effects. In our model, customers on each market side care differently about both the number and the type of customers on the other side. Examples of two-sided markets are online platforms or daily newspapers. In the latter case, for instance, readership demand depends on the amount and the type of advertisements. Also, advertising demand depends on the number of readers and the distribution of readers across demographic groups. There are feedback loops because advertising demand depends on the numbers of readers, which again depends on the amount of advertising, and so on. Due to the difficulty in dealing with such feedback loops when publishers set prices on both sides of the market, most of the literature has avoided models with Bertrand competition on both sides or has resorted to simplifying assumptions such as linear demands or th! e presence of only one network effect. We address this issue by first presenting intuitive sufficient conditions for demand on each side to be unique given prices on both sides. We then derive sufficient conditions for the existence and uniqueness of an equilibrium in prices. For merger analysis, or any other policy simulation in the context of competition policy, it is important that equilibria exist and are unique. Otherwise, one cannot predict prices or welfare effects after a merger or a policy change. The conditions are related to the own- and cross-price effects, as well as the strength of the own and cross network effects. We show that most functional forms used in empirical work, such as logit type demand functions, tend to satisfy these conditions for realistic values of the respective parameters. Finally, using data on the Dutch daily newspaper industry, we estimate a flexible model of demand which satisfies the above conditions and evaluate the effects of a hypot! hetical merger and study the effects of a shrinking market for offline newspapers.