Platform Industries Microsoft Randal C Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright 200018 Randal C Picker All Rights Reserved ID: 729683
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Class 23Antitrust Fall 2020Big Tech: Patents and Standard Setting
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © 2000-20 Randal C. Picker. All Rights Reserved.Slide2
November 11, 2020
2
What issues are posed by standard setting?
Can there be too much competition?
Can there be too little competition?
Are there pathologies in standard setting?Slide3
November 11, 2020
3
Winner Take All Markets
Two Sector Economy
500 individuals
One sector: everyone earns $10
Second sector: one person will earn $1000, everyone else will earn nothing, probability of winning is just 1/N
TTYN (1 of
2
)Slide4
November 11, 2020
4
Winner Take All Markets
Questions
What outcome do we want?
What outcome will we get?
What does this tell us about competition in standard setting?
TTYN (2 of
2
)Slide5
November 11, 2020
5
Winner Take All Markets
What do we want?
499 in sector 1, 1 in sector 2
GNP is 499 * 10 + 100* 1 = 5990Slide6
November 11, 2020
6
Winner Take All Markets
What outcome will we get?
Individuals enter sector 2 until expected return is $10.
100 individuals in sector 2, 400 in sector 1
GNP is 400 * 10 + 1000*1 + 99*0 = 5000
Same GNP as if we did not have WTA sector: the value of that sector is fully dissipatedSlide7
November 11, 2020
7
Too much competition?
Formats
Computer makers wanted to avoid multiple DVD formats ala VCR Beta and VHS formats
The letter seeking the review suggested that there were a number of possible formats for high-density disks (DIVX, MMDF and ASMO, for example)Slide8
November 11, 2020
8
Too much competition?
What are the harms of too much competition? What does that mean?
Winner Take All example suggests that too many firms may seek to set standardsSlide9
November 11, 2020
9
Consequences/Implications
Solutions?
Weaken property rights to solve the problem?
Allow collectivization ala DVD standard setting and patent pool to minimize competition?Slide10
November 11, 2020
10
Too little competition?
Collusion
If we permit firms to establish standards collectively, won’t they collude?
Won’t this result in lower output and higher prices, the classic harms of monopoly?
How should we evaluate whether a particular deal is collusive?Slide11
November 11, 2020
11
Pathologies in standard setting?
Basic Idea of Network Externalities
The more individuals using the product, the more valuable it is to each user.
The telephone is the classic example; a single-phone network is of no use.Slide12
November 11, 2020
12
Pathologies in standard setting?
Collective Adoption Defects
At least in theory, adoption of products with network externalities can be frustrated through collective action problems.
Excess inertia: an old standard should be displaced, but isn’t.
Excess momentum: an old standard should be maintained, but is not.Slide13
13
Technology Competition and Monopoly
1
st
Stage
2
nd
Stage
Possible Technologies
SSO
I
II
III
IVSlide14
14
Is This a Market Power Problem? No
1
st
Stage
2
nd
Stage
Possible Technologies
SSO
I
II
Purpose of patents is to
propertize
inventions and create power to
excludeSlide15
15
Is This a Market Power Problem? No
1
st
Stage
2
nd
Stage
Possible Technologies
SSO
I
II
Market
power rules (antitrust and network industries type regulation) should respect legitimately obtained property rights, including those that give rise to market
powerSlide16
16
Is This a Market Power Problem? No
1
st
Stage
2
nd
Stage
Possible Technologies
SSO
I
II
Exercise
of market power here through patent shouldn’t give rise to market power regulationSlide17
17
Is This a Market Power Problem? No
1
st
Stage
2
nd
Stage
Possible Technologies
SSO
III
IV
Should expect first-stage competition to limit harms of ex-post monopoly created through
selectionSlide18
18
Is This a Market Power Problem? No
1
st
Stage
2
nd
Stage
Possible Technologies
SSO
III
IV
That
goes to competing away second-stage monopoly
profitsSlide19
19
Is This a Market Power Problem? No
1
st
Stage
2
nd
Stage
Possible Technologies
SSO
III
IV
Also
should expect mechanism to control second-stage price setting to avoid deadweight lossesSlide20
Lexmark: Patent Exhaustion
November 11, 2020
20
581 U.S. ___ (2017)Slide21
Lexmark: Sale Exhausts Even with Contract Restriction
November 11, 2020
21
581 U.S. ___ (2017)Slide22
An Example of this at Work (Herein of
Privity
)
November 11, 202022
Lexmark (U.S. 2017)Slide23
Qualcomm
November 11, 2020
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FTC v. Qualcomm (CA9 2020)Slide24
Understanding Market Harms (The Role of the FTC and Not Getting Caught in
Illinois Brick
)
November 11, 202024
FTC v. Qualcomm (CA9 2020)Slide25
Five Sets of HyposInstruments in Issue1. Start with the ordinary patents baseline2. Play with the licensing level (chip maker v. OEM)3. Insert a FRAND licensing obligation
4
. Add vertical integration (let QC make chips)
5. Link together chip rules and licensing rulesNovember 11, 202025Slide26
Five Sets of HyposSee how the antitrust issues change
November 11, 2020
26Slide27
Set 1: Ordinary InventionHypo 1QC comes up with invention and gets a patent QC builds product embodying invention and sells productNo other firm can compete with QC w/o infringing
Antitrust issues?
November 11, 2020
27
TTYN (1 of
4
)Slide28
Set 1: Not Licensing the PatentHypo 2QC comes up with invention and gets a patent QC builds product embodying invention and sells productFirm Y approaches QC and offers to pay for a license but QC says no
Antitrust issues?
November 11, 2020
28
TTYN (2 of
4
)Slide29
Set 1: Licensing PatentHypo 3QC comes up with invention and gets a patent QC doesn’t practice patent but instead licenses patent to firm X so that X can produce a product embodying invention
No other firm can compete with X w/o infringing
Antitrust issues?
November 11, 202029
TTYN (3 of
4
)Slide30
Set 1: Enforcing the PatentHypo 4Same as hypo 3 but suppose firm Y enters with product embodying inventionQC sues Y for patent infringement and Y is forced to exit the market
Antitrust issues?
November 11, 2020
30
TTYN (4 of
4
)Slide31
Set 2: Open Licensing to Chip MakersHypo 1QC comes up with invention and gets a patent QC decides not to practice invention but offers license to firms to make chips
Licensees compete in chip market
Antitrust issues?
November 11, 202031
TTYN (1 of
3
)Slide32
Set 2: OEM Licensing OnlyHypo 2QC: invention and patent QC decides not to practice inventionQC won’t license patent to chip makers but promises not to sue them
QC offers licenses to OEMs
Antitrust issues?
November 11, 202032
TTYN (2 of
3
)Slide33
Set 2: Licensing LevelsQuestionsWhat do we think is at stake in the level that QC chooses to license at?
November 11, 2020
33
TTYN (3 of
3
)Slide34
Set 3: SSO LicensingHypo 1QC comes up with invention and gets a patentQC commits to standard setting organization (SSO) that it will license patent on RAND/FRAND terms
Allegation that QC breaches SSO deal
Antitrust issues?
November 11, 202034
TTYNSlide35
Set 4: Chip Maker Licensing with Vertical IntegrationHypo 1QC comes up with invention and gets a patent QC builds product embodying invention and sells product but also offers license to firms to make chips
Other firms can compete in chip market with QC
Antitrust issues?
November 11, 202035
TTYN (1 of
3
)Slide36
Set 4: OEM Licensing with Vertical IntegrationHypo 2QC: invention and patent QC practices invention
QC won’t license patent to chip makers but promises not to sue them
QC offers licenses to OEMs
Antitrust issues?November 11, 202036
TTYN (1 of
3
)Slide37
Set 4: Licensing Levels and Vertical IntegrationQuestionsWhat do we think is at stake in the level that QC chooses to license at?Does the fact that QC has vertically integrated into chip making change the prior discussion?
November 11, 2020
37
TTYN (3 of
3
)Slide38
Set 5: No Chips, No License Hypo 1QC: invention and patent QC builds and sells productOther firms compete in chip market with QC
QC won’t give an OEM a patent license unless they buy chips from QC
Antitrust issues?
November 11, 202038
TTYN (1 of
5
)Slide39
Set 5: Chips with License Hypo 2QC: invention and patentQC makes SSO obligation QC builds and sells product and license for its chips
QC won’t license patent to chip competitors but promises not to sue them
November 11, 2020
39
TTYN (2 of
5
)Slide40
Set 5: Chips with License Hypo 2Other firms compete in chip market with QCAntitrust issues?
November 11, 2020
40
TTYN (3 of
5
)Slide41
Set 5: No License, No ChipsHypo 3QC: invention and patentQC makes SSO obligation QC builds and sells product but won’t sell chips to OEM unless they take a license for
all
of the chips that the OEM uses
November 11, 202041
TTYN (4 of
5
)Slide42
Set 5: No License, No ChipsHypo 3QC won’t license patent to chip competitors but promises not to sue themAntitrust issues?
November 11, 2020
42
TTYN (5 of
5
)