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ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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Article 163 TEC
`1. The Community shall have the objective of strengthening the
scientific and technological bases of Community industry and
encouraging it to become more competitive at international level,
while promoting all the research activities deemed necessary by
virtue of other Chapters of this Treaty.
2. For this purpose the Community shall, throughout the Community,
encourage undertakings, including small and medium-sized
undertakings, research centres and universities in their research and
technological development activities of high quality; it shall support
their efforts to cooperate with one another, aiming, notably, at
enabling undertakings to exploit the internal market potential to
the full, in particular through the opening-up of national public
contracts, the definition of common standards and the removal of
legal and fiscal obstacles to that cooperation.*
3. All Community activities under this Treaty in the area of research and
technological development, including demonstration projects, shall
be decided on and implemented in accordance with the provisions of
this Title.'
* [emphasis added]
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
Preface
The Competitiveness Council
(Erkki Liikanen from DG Enterprise and
Information Society, Philippe Busquin from DG Research and Mario Monti
from DG Competition meeting at Brussels on November 26, 2002)
emphasized the need to create a European Research Area, which is to be
understood as a true internal market for science and knowledge. It is
particularly important to ensure consistency between the national and the
EU Research and Development (RD) policies in order to increase
investment in research and enhance the innovation and technology transfer
capacity. In boosting the potential of the European Research Area certain
framework conditions need to be transposed into practice among which `a
competitive environment with research and innovation-friendly regulations
and competition rules' is the most relevant to the present thesis.
Although technology consortia are rarely subject to antitrust scrutiny,
guidance is needed for a number of reasons. The very peculiar nature of
technology consortia can make it hard, if not impossible, to characterize a
consortium into specific categories such as horizontal, vertical or
conglomerate, which in turn makes it difficult to clearly delineate any
antitrust concerns. Furthermore, the European competition law regime is in
a crucial transformation process. With effect of 1 May 2004, the date of
entering into force of Regulation 1/2003 the whole of Article 81 will be
directly applicable in the member states. Thus any anti-competitive
agreement is no longer to be notified to the Commission for a compatibility
assessment under Article 81(3). Instead companies will have to assess the
compatibility of their agreement with Article 81 on their own.
In seeking guidance, the Commission likes to refer to its forty year
long decisional practice during which it has had the monopoly to handle
notified cases in respect of Article 81(3). Not surprisingly, uncertainties still
remain. This is not to say that the decisions are not helpful, but rather that
law is subject to interpretational developments. It is particularly
competition law that is rightfully influenced by economics and must be
determined in the individual setting. The law can not therefore provide
answers to all issues that have arisen due to commercial developments and
changing technology, which is why guidance on specific industry aspects
actually adds value.
Another effect of decentralization is the increasing need to preserve
consistency. The EU will soon finalize its giant enlargement round by 2004
including ten new mostly central and eastern European countries. Given
this massive extension of the common market, the Commission must ensure
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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consistency through monitoring and assistance in the implementation of EC
competition law and the establishment of appropriate antitrust
enforcement. This is a challenge of itself, but at the same time the
Commission must be in a position to prevent the wide substantive conditions
in Article 81(3) from being misapplied. Illegitimate interventions can
threaten consistency if these are triggered by national industrial policy
considerations distorting competition within the common market or by the
lack of a sound economic reasoning. This is a risk to be minimized
throughout the EU whether old or new member states, but an important one
within the scope of Article 163 to further the role of technology consortia in
exploiting economies of scale and disseminating innovative technology more
rapidly.
It is also the essence of technology consortia that gives rise to doubts
as to the limits of competition law. The intellectual property rights (IPR)
influencing the work of a consortium can initiate a dilemma. Whilst
interference with IPR on the basis that these constitute a restriction of
competition may be justified in very limited circumstances, it must be
carefully analyzed and clearly stated in what circumstances an intervention
is warranted. This is because the very nature of IPR is to restrict
competition. The law at the intersection between competition and
intellectual property issues is not entirely clear and remains an analytical
challenge for the application of Article 81 to technology consortia.
Similarly, Article 82 and its application to IPR puzzle business and antitrust
authorities. In this area, the essential facilities doctrine may arguably have
played a role in granting compulsory licenses raising the same dilemma as
under Article 81. The appropriateness of the essential facilities doctrine
and a refinement of circumstances in which Article 82 applies to IPR remain
issues to be resolved in the quest to introduce more legal certainty.
In pursuit of addressing these issues it is attempted to show the
practical relevance of this study. To that end, case studies of real-life
technology consortia have been carried out to better understand the
incentives, competitive impact and contribution to technical progress of
these inter-firm collaborations. The business press also features the
practical relevance of technology consortia, whereas the empirical studies
help to identify the crucial issues to be reconciled at the interface between
competition and intellectual property law.
Competition law is to me the most exciting and fast-moving areas of
the law. I have had the great benefit of excellent competition law courses
at the University of Strathclyde, which have captured my interest since
second year of university. In this context, I would like to thank Professor
Barry Rodger for his topical and intellectually stimulating competition law
sessions at undergraduate and Honours level as well as for his committed
supervision of my Honours dissertation. It is a great pleasure to keep up the
exchange of ideas through the Competition Law Scholars Forum.
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
I am also grateful to have had the opportunity to discuss competition
law issues with fellows of the university especially, Anna Roubier and
Massimo Coluzzi. I could not express the enthusiasm any better than in your
words Massimo, `it has always been just as much fun to talk about
competition law as about football'. I would also like to express my
gratitude to Stefanie for her endless love and support. A big thank you and
appreciation also go to my parents Anne and Winfried, and my brother
Stephan for their love and support making all this possible.
I would also like to thank Jens-Daniel Braun and Professor Dr. Koenig
for being my thesis supervisors. Jens-Daniel has been very helpful in the
supervision meetings in discussing the overall structure and some of the
sources of the present thesis. Professor Dr. Koenig has made this Master
year an outstanding experience through his representation of Doc Morris in
the free movement of goods case before the ECJ. The discussion sessions
with him on free movement as well as state aid have been a real
experience.
I acknowledge with thanks the help of Mrs. Matintiz of the
Bundeskartellamt library and the librarians of the law school at the
University of Strathclyde for letting me use their resources in the
preparation of this thesis.
I have been able to include developments up to 26 June 2003.
Andreas Seip
Center for European Integration Studies, Bonn.
University of Strathclyde, Glasgow.
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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CONTENTS
1 INTRODUCTION... - 8 -
2 THE ECONOMIC REASONING OF TECH CONSORTIA... - 10 -
2.1 The Incentives Mechanism ... - 13 -
2.2 Contrasting
Stability Issues... - 16 -
2.2.1
Formalization of the Arrangement ... - 17 -
2.2.2
Penalizing any Innovation Shortfall ... - 17 -
2.2.3
Ejecting the Cheating Member ... - 18 -
2.2.4
Sustaining the Consortium despite Default ... - 19 -
2.3 Benefits
and
Risks... - 19 -
2.3.1
Risk Diminishing Factors ... - 21 -
2.3.2
Risk Increasing Factors ... - 24 -
2.4 Issues Relevant for Assessment ... - 25 -
3 POLICY IMPLICATIONS FOR COMPETITION LAW ... - 27 -
3.1 General Standard Setting Cooperation... - 29 -
3.2 Specialised Cooperation - Technology Consortia ... - 32 -
3.3 Competition
Impact Assessment ... - 34 -
3.3.1
Market Power... - 37 -
3.3.2
Cooperative Momentum ... - 39 -
3.3.3
IPR Reliance ... - 40 -
3.3.4
Ancillary Restraints ... - 42 -
3.4 From Policy to Competition Law ... - 43 -
4 THE COMPETITION LAW PERSPECTIVE ... - 45 -
4.1 Article 81: General Scope ... - 46 -
4.1.1
The Ins and Outs under Article 81 ... - 47 -
4.1.1.1
Induced Collusion ... - 48 -
4.1.1.2
Limitation of Technical Development... - 49 -
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
4.1.2
The De Minimis Exception ... - 50 -
4.1.3
Relevance of Block Exemptions... - 51 -
4.1.3.1
Research Development Agreements Regulation.. - 52 -
4.1.3.2
Specialisation/Production Agreements Regulation . - 54 -
4.1.3.3
Technology Transfer Agreements Regulation... - 55 -
4.1.3.4
Appropriateness of Block Exemptions... - 56 -
4.2 Self-Assessment under Article 81(3) ... - 58 -
4.2.1 Economic
and
Other Benefits ... - 59 -
4.2.2
Consumer Benefits ... - 60 -
4.2.3
Indispensability ... - 61 -
4.2.4
No Elimination of Competition ... - 61 -
4.2.5
Article 81(3) in Retrospect ... - 62 -
4.3 Issues Requiring Clarification under Article 81 ... - 64 -
4.4 Article 82: General Scope ... - 66 -
4.4.1
The Ins and Outs under Article 82 ... - 67 -
4.4.1.1
Abuse: Submarine IPR ... - 67 -
4.4.1.2
Access Conditions: IPR as Essential Facility?... - 71 -
4.5 Appropriateness of the Essential Facilities Doctrine: ... - 74 -
4.6 Beyond IMS Health Future Application... - 77 -
4.7 Reconciling Competition Law with Intellectual Property Law:
Formulating a Technology Consortium's IPR Policy ... - 79 -
5 CONCLUSION:
MAIN
FINDINGS ... - 86 -
Appendix...- 91 -
Bibliography...- 100 -
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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INTRODUCTION
This thesis is to provide guidance for the antitrust analysis of
technology consortia which is challenged by virtue of the various forms the
inter-firm collaboration may take, the pooling of intellectual property rights
(IPR) and the ambivalent impact this may have on competition. The
starting point to a meaningful antitrust analysis of technology consortia is an
understanding of the underlying economics. The following chapter is to
briefly discuss the incentives of firms to cooperate, the contrasting stability
issues prevailing in an anti-competitive cartel as opposed to innovation
driven consortia, and the resultant welfare implications in terms of the
benefits and risks of cooperation.
This will allow an outline of the workable policy approach to be
pursued in applying antitrust law. The third chapter focuses thereby on
issues of antitrust analysis by distinguishing between two main types of
technology consortia and their role in the innovation process. The
assessment is to help the identification of the essential elements in antirust
analysis ranging from relevant market definition to market power and
intellectual property rights (IPR).
In the fourth chapter, EC competition law is specifically examined
against the discussed policy approach. This includes a consideration of
relevant anti-competitive conduct relating to technology consortia under
Article 81, the relevance of block exemptions, and finally the self-
assessment under Article 81(3). In addition to a discussion of the
intersection between IPR and Article 81, this will continue to be relevant for
the assessment of IPR under Article 82. This chapter will end with a
recommendation as to how IPR policies of technology consortia should be
formulated to alleviate some antitrust concerns.
1
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
The final chapter is to conclude that both intellectual property law
and competition law work towards the promotion of innovation provided
that all stakeholders including firms, competition authorities and courts
respect the innovation economics and legal sensitive issues. In order to
promote such an awareness the identified uncertainties are addressed in
tests, which are to evaluate the competitive implications of technology
consortia, whereas the IPR policy is to support the prevention of an antitrust
challenge. The refined analysis is then provisionally translated in the
format of a guidance notice in the appendix to this thesis.
Technology consortia play a crucial role in the competitiveness of
firms operating in innovation markets. This is evidenced by the fact that
often a single firm is a member to a great many different consortia. The
welfare implications and therefore the justification for antitrust
intervention may vary according to the different stages they operate in the
innovation process. For the purposes of the present thesis, technology
consortia have to be distinguished from joint ventures since consortia can
already operate at the earliest stage of idea generation up to the
development of a prototype. Although partly overlapping, a joint venture
usually just starts its operation at the point of prototype development up to
the full commercialization of the product.
The discussion on Article 81 and Article 82 will be conducted on the
basis of selective anti-competitive and abusive practices that may affect
technology consortia either directly or indirectly. The focus will thereby be
placed on the future practice once Regulation 1/2003 enters into force. In
identifying crucial uncertainties that could limit the effectiveness of the
antitrust enforcement regime, an assessment of the relevant decisional
practice by the Commission and by the European Court of Justice (ECJ)
cases is necessary.
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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THE ECONOMIC REASONING
OF TECH CONSORTIA
Technology consortia are a mechanism of technology trading that
needs to be distinguished from the unilateral licensing of proprietary
technology, which can precede the collaboration in a technology
consortium. Technology trading within technology consortia involves firms
trading a right to use one another's technology, rather than the unilateral
sale of such a right via licenses.
1
There is a multitude of arrangements
possible that come within the scope of a technology consortium. The
exchange of technology could thus be organized within a trade association
that maintains a research facility and is financed by its members who also
benefit from its findings.
Similarly, two or more firms may decide to set up a complementary
facility engaging in RD and use its findings for the participating
undertakings' purposes.
2
In addition, the exchange itself can take various
forms including explicit communication of research findings on the
companies' initiatives, or answering questions on request of another
participating firm, and plant visits by engineers and technical training of
staff.
3
The table below illustrates the variety of possible collaborations that
usually distinguish technology consortia from other types of inter-
1
Baumol, W.J. The Free-Market Innovation Machine Analyzing the Growth Miracle of
Capitalism (Princeton, New Jersey: Princeton University Press, 2002), at p. 93. For a
concise treatment of economic choices open to firm, which is to determine whether to
licence or not and the implications thereof see Beard, R.T. and Kaserman, D.L. `Patent
Thickets, Cross-Licensing, and Antitrust' 2002 Antitrust Bulletin, 345, at pp. 347 350.
2
Consortia are usually much larger than joint ventures in terms of membership see further
Rigatuso, C., Tachi, T., Sylvester, D. and Soper, M. `Collaboration between Firms in
Information Technology' EE 290X Group G, at p.2, available at
http://www-inst.eecs.
berkely.edu/~eecsbal/s97/reports/eecsbalg/report/report.html
, downloaded 2 January
2003.
3
See also Immenga, U. and Mestmäcker, E.J. (Eds.) EG-Wettbewerbsrecht: Kommentar,
Band I (Munich, Germany: C.H. Beck, 1997), at p. 1418.
2
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
organizational cooperation and the role these organizations play in the
different steps of the innovation process.
4
Box 2.1.: Technological Innovation Process
Idea
Gene-
ration
Fea
sibil
ity
Stud
y
Produ
ct
Devel
opme
nt
Prototy
pe and
Pilot
Plant
Constr
uction
Interi
m
Manuf
acturi
ng
Full
Commerc
ialization
Industry/
University.
Cooperative
Research
Centers
(IUCRC)
yes
yes
RD
Ltd.
Partnerships
(RDLP)
yes
yes
yes
yes
Joint
Ventures
yes
yes
yes
Consortium
yes
yes
yes
yes
Whatever the arrangement and nature of the exchange chosen for the
respective technology consortium, there are a variety of reasons for firms to
engage in the sharing of their proprietary technology and know-how.
5
The
work of a technology consortium is usually complementary to the firms' own
RD. Without relinquishing a firm's own RD, it can benefit from the
4
Table source: Rigatuso, C. et al. (2003), at pp. 6 and 7.
5
For comprehensive discussion of reasons underlying technology consortia see further Katz,
M.L. and Ordover, J.A. `RD Coopaeration and Competition' in Brookings Papers on
Microeconomics (Washington, D.C., Washington: Brookings Institutions, 1990), at pp. 137
203.
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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important know-how exchange in the consortium. Technology consortia may
work on standard-setting
6
ensuring interoperability
7
, develop improved
production and process technology
8
, or work on the improvement of product
components. Among the most frequently cited by both businesspersons and
scholars, is the sharing of the high cost burden in the innovation process
from the initial RD to reaching marketing maturity.
9
Although this is a
valid reason, it lacks comprehensiveness and persuasion in explaining why
firms frequently revert to technology consortia as a means of cooperation.
There is an interdependent incentives mechanism discussed in economic
literature that provides further understanding of technology consortia.
10
Obviously, profitability induces firms to participate in sharing their
technology, which is enhanced by the fact that the firms engage in
complementary research. If the undertakings were to carry out RD in
substitute innovations, which are mutually competitive they would not have
an incentive to cooperate and would rather seek to avoid a spreading of
their proprietary technology.
Complementary RD is all the more compelling in high-tech industries
with rapidly evolving technology, where the large scale of firms is often due
to their investments in incremental improvements of products and process
rather than through leapfrogging with revolutionary new products.
11
Thus,
in outlining the incentives mechanism exhibited by technology consortia,
6
See further the MPEG example in section 4.1.1.2. Limitation of Technical Development.
7
See further Bluetooth SIG example in section 3.1. General Standard-Setting Cooperation.
8
See further SEMATECH example in section 3.2. Specialised Cooperation Technology
Consortia.
9
Rigatuso, C. et al. (2003), at p.3. See also Baumol, W.J. (2002), at p. 95.
10
Baumol draws on his experience in real life consultancy and economic theory. For the
technology consortium model, see Baumol, W.J. (2002), at pp. 97 106.
11
Baumol, W.J. (2002), at p. 96. Although the process of leapfrogging and `creative
destruction' still holds true as a competitive pressure as discussed in Seip, A. `Merger Policy
in the E-conomy' (Glasgow, Scotland: University of Strathclyde, 2002), at pp. 27 29, 31 for
background and p. 44 available at
http://www.e-efficiency.de
. See also Posner, R.
`Antitrust in the New Economy' 2001 Antitrust Law Journal, 925-943,
Ordover, J.A. `Antitrust for the New Economy or New Economics for Antitrust'
Summary of Remarks at the FTC/DOJ Hearings "Competition and Intellectual Property Law
and Policy in the Knowledge-Based Economy" Washington D.C., 20 February 2002, and
Schmalensee, R. `Antitrust Issues in Schumpeterian Industries' 2000 American Economic
Review (90), 192, at p. 193. The relationship between competition for the market and
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
the focus will necessarily be placed on the complementary nature of
innovative findings.
2 . 1 .
T h e I n c e n t i v e s M e c h a n i s m
The incentives discussed are based on the Technology-Consortium
Model as advanced recently by Baumol.
12
One of the major premises is to
assume the complementary nature of innovations that serve the incremental
improvement of products to make these cheaper. Although the model
assumes rather unrealistically that each firms spends the same amount on
RD and earns the same return on its expenditure for the sake of simplicity,
this does not invalidate the main incentives shown in the model. This is
because the assumptions are only there to allow better exemplification of
the benefits, which cannot be negated just by virtue of their simplification.
The first incentive can be determined as being one of cost-reduction
and speed.
13
Although the cost of imitating respective participants'
technology in consortia is not negligible in comparison to the innovator's
cost, the transferee gains significant net benefits. This is easily explained
by empirical studies that show that a friendly transfer is far less costly than
reverse engineering or industrial espionage.
14
In addition, in rapidly
within the market is also discussed for the cooperative setting below in section 2.3.
Benefits and Risks.
12
Baumol, W.J. (2002), at pp. 97 106.
13
See also Shapiro, C. `Competition Policy and Innovation' STI Working Papers 2002/11
(Paris, France: OECD, 2002), at p. 26, Sachwald, F. `The Challenge of Innovation-Based
Competition: A Transatlantic Perspective' in Sherman, N. (ed.) The Impact of the Internet
Revolution on International Economic Relations and Society, Tokyo Club Papers No. 14
(Munich, Germany: Institute for Economic Research, 2001), at p. 7, and Glader, M.
`Innovation Economics and the Antitrust Guidelines on Horizontal Cooperation' 2001 World
Competition 24(4), 513 540, at p. 520. See also Rigatuso, C. et al. (2003), at pp.3 and 9.
It is also illustrated in the SEMATECH case study (section 3.2. Specialised Cooperation
Technology Consortia) that cost-reduction is very important and can amount to 50% savings
as a result of participating in the consortium as the SEMATECH experience demonstrates on
the basis of its developed Cost Ownership Model estimating the cost of ownership for
individual pieces of semiconductor manufacturing equipment over its lifetime.
14
Nelson, R. R. The Sources of Economic Growth ((Cambridge, Massachusetts: Harvard
University Press, 1996). See also Mansfield, E., Schwartz, M. and Wagner, S. `Imitation
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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evolving high-tech industries speed is of paramount importance, which
makes a speedy transfer of technical information mandatory to prevent
it from becoming obsolete.
15
The second incentive is the result of the penalizing effect of the
cost-reducing incentive. The holdout undertaking is anxious not to lose
money due to its non-membership. However, for as long as the undertaking
is not a member of the technology consortia, it can expect higher
manufacturing costs of its final products since it cannot revert to the RD
efforts of the technology consortium. This cost disadvantage will further
grow cumulatively over time unless the holdout undertaking exhibits strong
scale economies or other special circumstances that allow a higher
expenditure on RD, while still achieving better cost reductions than the
members of the technology consortium.
There is also the incentive of taking advantage of risk insurance by
virtue of being a member in the technology consortium. RD is a costly and
risky adventure, which will not always yield the desired results, or may even
achieve only little or no value at all in the pursuit of commercial
introductions. Yet, it is in these instances when technology consortia
provide protection in a given year since the unsuccessful undertaking still
benefits from the innovations of the remaining participating undertakings.
16
Beyond the incentives shown by the technology consortium model,
there are also other incentives that may vary in strength depending on the
individual economic circumstances at hand. Thus, as will be shown by the
Bluetooth Special Interest Group (SIG) case study
17
, there may be strong
incentives concerning compatibility and standardization of different
technologies to allow for greater, interoperable variety of products to be
Costs and Patent Costs: An Empirical Study.' 1981 Economic Journal 91 (December), 907
918.
15
The tremendous speed of technological change is also a factor which influences a firm's
choice towards trade secrets instead of patents. See also Beard, R.T. and Kaserman, D.L.
(2002), at pp. 348 and 349.
16
For a real life-example see the Japanese FGCS project discussed in Rigatuso, C. et al.
(2003), at p. 8.
17
See below Box 3.2. in Section 3.1. General Standard-Setting Cooperation.
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
developed.
18
Cooperative standard-setting in this context allows a group of
companies to achieve network externalities.
19
The essence of network
effects is that it makes sense for the standardized technology at hand to be
used by as many users as possible who can then interact. Thus, for network
effects to occur there needs to be a critical mass of users, the number of
which depends on the technology and investment in question, and
interoperability.
20
From the producers' perspective the decision as to whether to
cooperate depends on the user power of the resultant network. For
example, three firms seeking to develop standards to ensure interoperability
of their devices. X is producing laptops; Y produces mobile phones and Z
satellite hardware. If they decide not to cooperate, then each of these
products constitutes a different network. If, however, they decide to
cooperate and develop an interoperable standard, then all these products
belong to the same network. Consequently, the interoperable network
comprised of different compatible products has a larger value to both
supplier and consumer.
21
18
Rigatuso, C. et al. (2003), at p.3. See also Updegrove, A. `Forming and Representing
High-Technology Consortia: Legal and Strategic Issues' Section: Why Form a Consortium?
available at
http://www.lgu.com/publications/consortium/4.shtml
, downloaded on 2
January 2003.
19
Katz, M.L. and Shapiro, C. `Antitrust in Software Markets' University of California at
Berkely, 22 September 1998 available at
http://faculty.haas.berkely.edu/shapiro
,
downloaded on 2 January 2002, at pp. 29 -30.
20
Network effects and the consequential developments are discussed in Seip, A. (2002), at
pp. 27 29.
21
Recent commercial developments have evidenced that technology requires increasingly
collaborations among non-competitors. Thus, for example, to make 3G mobiles worthwhile
and profitable mobile equipment manufacturers will need to cooperate with software firms
and content providers just as well as with network providers. This is to allow the provision
of content and delivery through the appropriate soft- and hardware. It is then one network
of interoperable products that is likely to compete against another network. This may also
be referred to as system competition or intermarket competition. For examples, see Seip,
A. (2002), at pp. 80, 83 and 85. The Commission has taken a favourable view on 3G
infrastructure sharing in Germany and the UK see further Ratliff, J. `Major Events and
Policy Issues in EC Competition Law 2001 2002: Part 2' [2003] ICCLR 87, at pp. 91 92.
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
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2 . 2 .
C o n t r a s t i n g S t a b i l i t y I s s u e s
Price setting cartels and technology consortia are very different.
Not just because of the obvious reason that hardcore cartels are anti-
competitive and technology consortia generally pro-competitive, but also
because of the different incentives or disincentives for cheating that prevail
in the respective equilibrium. In order to identify the incentives and
disincentives it is sensible to distinguish between the short and long run.
22
In respect of price-fixing cartels, a member can profit in the short run by
undercutting the prices of the other members achieving thereby sales above
its quota. Similarly, the short run scenario for technology consortia would
be the cheating member to retain its information, whilst benefiting from the
other members' disclosure of proprietary technology.
The crucial difference impacting on stability becomes apparent in the
long term. In a price-fixing cartel, it is worth for the customer to act as a
co-conspirator to the cheating cartel member. Lower prices make it also
more difficult to detect such a cartel on the initiative of the demand side.
23
Yet, no customer's acquiescence is needed for cheating in a technology
consortium. Stability of technology consortia result from repetition of the
exchange. In addition, there are monitoring criteria that indicate cheating
of one technology consortium member such as long-lasting cost reductions,
or changes in product characteristics or industry gossip that discourage
undertakings from cheating. The following retaliatory mechanisms in
technology consortia can be more effective in discouraging cheating
protecting it thereby from collapsing.
22
The short term long term distinction is crucial as the differences impacting on stability
will become apparent in the long term. See further Baumol, W.J. (2002), at pp. 106 - 109.
23
The cheating firm will lower the prices by producing above the collusive output.
However, lower prices do not necessarily indicate that someone cheated because a low
price is consistent with other factors which shifted market demand, such as recession. The
imperfection in monitoring collusion makes the sustainability of a cartel more difficult. See
further Green, E.J. and Porter, R.H. `Noncooperative Collusion under Imperfect Price
Information' 1984 Econometrica 52, 87 100; for empirical illustration of the destabilising
impact of recession see Suslow, V. `Stability in International Cartels: An Empirical Survey'
(Working Papers in Economics, E-88-7: Hoover Institution, 1988); Viscusi, W.K., Vernon,
J.M., and Harrington, J.E.Jr. Economics of Regulation and Antitrust (Cambridge,
Massachusetts: MIT Press, 3
rd
Edition, 2000), at p. 120.
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
2.2.1.
Formalization of the Arrangement
Firstly, consortium members can abandon an informal exchange
arrangement where the mutual trust has been frustrated through cheating
and can substitute it with a more formal exchange mechanism such as cross-
licensing of patents. Cross-licensing refers to an agreement by two or more
firms, which allows each firm to practice some IPR of the other firm without
being sued for infringement. It may contain provisions on the payment of
royalties and monitoring procedures.
24
The US experience shows that the
courts are encouraging cross-licensing of patents since it is believed to be
pro-competitive especially in respect of integrating complementary
technologies.
25
In Townsend v. Rockwell Int'l Corp.
26
the US court held it
to be legitimate for the patent holder to earn an optimal royalty income,
whereby the court will not interfere with the terms of the licensing
arrangement. Furthermore, the Court denied finding a restraint of trade
where a patent holder refuses to license its technology to others. A patent
holder's mere attempt to secure royalty income is not a restraint of trade.
27
2.2.2.
Penalizing any Innovation Shortfall
Secondly, Baumol mentions a real life mechanism that discourages
cheating by firms providing for monetary compensation to be paid to the
24
See Beard, R.T. and Kaserman, D.L. (2002), at p. 345.
25
See also Beard, R.T. and Kaserman, D.L. (2002), at pp. 354 357 arguing that anti-
competitive effects can only result from ancillary restraints attached to cross-licenses. The
advantage of cross-licences is that the retention of some specific and valuable know-how
avoiding thereby full access, whilst unblocking any IPR needed in the development process.
Other advantages of cross-licences include the avoidance of inventing around the IPR of
competing firms, lowering transaction costs and the costs in the downstream market(s).
See also section 3.3.3. IPR Reliance on effects of cross-licences.
26
Townsend v. Rockwell Int'l Corp., 55 U.S.P.Q.2D (BNA) 1011; 2000-1 Trade Cas. (CCH)
72,890 (N.D. Cal. March 28, 2000).
27
Townsend v. Rockwell Int'l Corp. has been subject to criticism in so far that the courts
should not take a hands-off approach in respect of firms imposing whatever terms they find
appropriate just to secure a long-term monopoly. A concealment of IPR for securing a
competitive advantage may be justified. See Lemley, M.A. Intellectual Property Rights and
Standard-Setting Organizations' 2002 California Law Review (90), 1889, at p. 1930. The
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
- 18 -
other firm for any shortfall in the value of innovation exchanged.
28
Thus
firms meet regularly to negotiate monetary compensation to be paid, if
one firm fails to deliver the value in innovation expected before the next
meeting. Consequently, the firms have a strong incentive to reveal their
innovations since if a firm decides to conceal its results; it simply increases
the amount it must pay to the other firm as compensation. Although
Baumol acknowledges an adverse selection problem in that the innovating
firm is more likely to know the true value of the invention, he suggests that
this problem is less serious where the parties have gained trust in their
respective integrity through repeated bargaining.
29
2.2.3.
Ejecting the Cheating Member
Apart from the two options to formalize the nature of the technology
consortium, there is the important disincentive to cheating with ejection
from the technology consortium. This is an omnipresent and more
automatic option inherent in the consortium of which the parties are all
aware. The non-membership constitutes an ever growing opportunity loss,
which is likely to be very costly in the long run. Non-members to a price
cartel, in contrast, may even benefit from price increases by the cartel,
whereas the non-member to technology consortium can only benefit from
innovation spillover.
30
This is all the more pertinent in highly contestable markets, where
external pressures through entrant competition strengthen the stability of
the technology consortium because it gives further incentive to sustain the
competitive advantage by virtue of being a member in the consortium. This
contrasts sharply with price cartels where entry usually destabilizes
collusion in the absence of a factor that prevents entry.
31
It follows that
technology consortia and price cartels can also have very diverging internal
approach in the EU is the same. The mere exercise of IPR does not constitute an abuse, see
Hoffmann-La Roche v. Centrafarm [1978] ECR 1139
28
Baumol, W.J. (2002), at p. 108.
29
Ibid.
30
ibid.
31
Viscusi, W.K. et al. (2000), at p. 120.
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
and external stability issues that govern their respective equilibrium in the
long term.
2.2.4.
Sustaining the Consortium despite Default
Another distinguishing feature of technology consortia is their
sustainability even in cases of members' defect. If a member fails to obey
the terms and practice of the information exchange arrangement, each
remaining member will continue to benefit from access to the RD findings
of the other members. Thus the remaining members still derive an
advantage over non-members. However, a price cartel is more vulnerable in
cases of cheating, which usually results in a collapse of the cartel. This is
because once cheating on part of cartel members is suspected it becomes
dangerous for the other cartel members to obey their cartel's decision since
it is likely that the customers will be attracted to the cheating
undertakings.
32
It is worth mentioning in this context that a regulatory
incentive has been created by the Commission with its adopted leniency
policy, which also has an external impact on the stability of a price cartel.
33
2 . 3 .
B e n e f i t s a n d R i s k s
It is at this point where the first benefits and risks can be discerned
necessary to derive the policy implications for the application of Article 81
and Article 82. Most relevant is an awareness of the welfare consequences
32
Baumol, W.J. (2002), at p. 109.
33
The conditions are outlined in the `Commission notice on Immunity from fines and
reduction of fines in cartel cases' OJ C 45, 19.02.2002, p. 3-5. Also available under
http://www.europa.eu.int/comm/competition/antitrust/leniency/
downloaded on January
2, 2003. It allows undertakings that are party to a hardcore cartel to end their illegal
practice and provide an incentive to do so by either granting immunity from fines or a
reduction in the amount of fines provided that certain requirements are met. It includes
for immunity to be the first undertaking to disclose evidence which enables the Commission
commence proceedings or find an infringement in addition to full and continuous
cooperation with Commission. For a reduction of fines the evidence must be of `significant
added value', which is determined by the nature and strength of the evidence. If it is the
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
- 20 -
of technology consortia as a form of cooperation with either vertical,
horizontal or conglomerate elements. Technology consortia tend to
generate welfare benefits in terms of wider and rapid use of innovations.
34
However, welfare implications are not clear-cut. One must first
distinguish between compatibility and incompatibility. If faced with
incompatibility, undertakings will compete for the market to create a de
facto standard without cooperation.
35
If these undertakings, however,
choose to cooperate they compete within the market through subsequent
development of products that build upon the cooperative standard or
technology.
36
An important result of the incompatibility compatibility
dichotomy may be that with incompatible standards each standard and the
related product(s) constitute a narrow market, whereas a cooperative
compatible standard with its related product(s) constitute a wider market or
network. In the absence of cooperative standard-setting the undertakings
see themselves confronted with a fragmented market, consisting of multiple
and incompatible products, which may eventually contain only a single
proprietary product.
37
It follows that cooperative standard-setting may prevent a firm from
utilizing network effects that could lead to the adoption of a single
proprietary standard monopolizing their products.
38
Although cooperative
first undertaking to submit evidence in an already undergoing investigation, it can achieve
a reduction of up to 50 per cent in the level of the fine.
34
Much of the innovation of today requires cooperation to come about in the first place.
See Glader, M. (2001), at pp. 519 520 and Rigatuso, C. et al. (2003), at p. 8. A
prerequisite to economic growth is the speedy transfer of technology. To that end, the
innovation process and commercial exploitation can be efficiently facilitated by
collaboration in a technology consortium. See further Sachwald, F. (2001), at pp. 3 and 7.
35
De facto standards are a result of market forces and must be distinguished from de iure
standards which have been promulgated by legislative bodies, official standard authorities
or standard-setting organisations. See Koenig, C., Bartosch, A. and Braun, J.D. EC
Competition and Telecommunications Law (The Hague, Netherlands: Kluwer Law
International, 2002), at pp. 620 621.
36
See also Katz, M.L. and Shapiro, C. (2002), at pp. 29 -30, Lind, R.C. and Muysert, P.
`Innovation and Competition Policy: Challenges for the New Millenium' [2003] ECLR 87, at
pp. 89 90.
37
See also Katz, M.L. and Shapiro, C. (2002), at pp. 27 - 29.
38
An example of an almost monopolisation constitutes Microsoft market share of 95% in PC
operating system, which is safeguarded by high entry barriers through the wider availability
of compatible software and Intel compatibility. Similarly, the attempted monopolisation of
the Internet browser. See also Gey, P. `Das Berufungsurteil in Sachen Microsoft
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
standard-setting tends to decrease competition in the short-term whilst the
standard technology is developed, it intensifies competition in the long term
(2 10 years depending on the momentum of the standard) following the
adoption of the standard.
39
On the basis of the standard, firms will compete
along price,
performance, features and service. It is a trade-off between
ex ante and ex post competition.
40
However, this has to be monitored carefully to avoid collusive or
monopolistic conduct, whereby the sharing of technical information leads to
undercut RD investments or foreclose competition. Particularly, the risk
of colluding competitors that cut their expenditure on innovation to save on
effort and expense should not be underestimated.
41
This could be a
plausible incentive for undertakings that do not face effective competition
outside the consortium.
2.3.1.
Risk Diminishing Factors
Yet, a factor that diminishes the risk of collusion is the
complementary nature of innovation. The information sharing will
Kartellrecht in dynamischen Technologiemärkten' 2001 Wirtschaft und Wettbewerb (10), p.
933, at pp. 936 -939. See also Fox, E. `What is Harm to Competition? Exclusionary
Practices and Anticompetitive Effect' 2002 Antitrust L.J., 371, at pp. 384 391. The
Microsoft Windows de facto standard is also a good example for the often referred
bandwagon effect, which arises if other firms market compatible products to the de facto
technology making the firm owning the standard even more powerful. In the Microsoft case
this would refer to producers of software that runs on the operating system. See Koenig,
C., et al (2002), at p. 623.
39
See also Sachwald, F. (2001), at pp. 11-12. The widest possible adoption of the standard
through the development of compatible products is therefore crucial to the success of the
standard. A process that may sometimes be subject to difficulties as industry members
hesitate to adopt a new standard as observed in the telecommunications industry see
Koenig, C., et al (2002), at pp. 623 625.
40
See also Katz, M.L. and Shapiro, C. (2002), at pp. 29 -30; and Shapiro, C. (Paris, France:
OECD, 2002), at p.27. The trade-off between cooperative standard-setting and unilateral
standard-setting is challenging task for competition authorities since the securing of a
compatible infrastructure may conflict with potentially best technical solutions. See Böge,
U. `E-Commerce and Competition' in Hellenic Competition Commission EU Competition Law
Policy: Developments Priorities (Athens, Greece: Nomiki Bibliothiki SA, 2002), at p.69.
ANTITRUST IMPLICATIONS OF TECHNOLOGY CONSORTIA
- 22 -
generally result in a positive feedback since it induces an increase in the
profit maximizing oligopolist's spending on innovation.
42
A prerequisite
for this positive feedback to arise is an implication of the Cournot Model.
43
According to Cournot, if two firms were to produce identical products
in terms of being interchangeable, then the profits of each firm will depend
not only on its own output quantity, but also on the quantity of the other
firm. The profit/quantity relationship clearly characterizes the
interdependence of an oligopoly in that the more one competitor produces,
the lower is the market price for the good, causing the revenue and
therefore the profit of the other firm to fall.
44
Therefore, the undertakings
will follow the most profit-maximizing output given the respective output of
their competitors.
In the case of complementary products developed by technology
consortia the reverse reasoning on the basis of Cournot can be established.
The oligopolists' interdependent relationship is no longer affected by each
other's quantity decisions, but rather on their individual contribution to the
innovative success. The more firms in a technology consortium can
innovate, the more they can raise profits and the more they are willing to
invest in further RD. It follows that the quantity/price relationship in case
of identical products and the innovation quota/profit relationship in case of
complementary products are the crucial determinants that can be clearly
discerned from Cournot.
Price-Makers. Given that the firms are large scale they know that
their output decisions will affect market prices and are then not price
41
Shapiro, C. `Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-
Setting' in Jaffe, A., Lerner, J. and Stern, S. (eds.) Innovation Policy and the Economy
(Cambridge, Massachusetts: MIT Press, 2001), at p. 23.
42
Baumol, W.J. (2002), at pp. 101 02.
43
Cournot has influenced many oligopoly theories and is most widely used still today.
Developed by Augustin Cournot in 1838. Cournot, A. Research into the Mathematical
Principles of the Theory of Wealth English Edition, translated by Bacon, N.T. (New York,
New York: Kelley, 1960). See also Morasch, K. Industrie- und Wettbewerbspolitik
Zentralisierung oder Dezentralisierung (München, Germany: Oldenbourg, 2003), at pp. 18 -
27. Schmidt, I. Wettbewerbspolitik und Kartellrecht (Stuttgart, Germany: Lucius Lucius,
2001), at p. 5 and Folz, C.H. Technologiegemeinschaften und Gruppenfreistellung (Köln,
Germany: Carl Heymanns, 2002), at pp. 61 62.
44
Viscusi, W.K. et al. (2000), at p. 103.
Economic Reasoning, Competition Law and Intellectual Property Law Issues.
25 June 2003.
takers. This also means that prices are higher than marginal costs. Yet, the
Cournot price is still lower than the monopolistic price as each firm only
cares about its own profits and not the industry profits.
45
Product Differentiation. A further proposition of the Cournot Model
is that as soon as product differentiation is injected, then the scope for
attracting additional demand from competitors through price cuts is
reduced. Unlike in cases of homogenous products where price cuts have an
immediate effect on market share, differentiated products can justify a
higher price since consumers regard the products as being less
interchangeable, the more differentiated the products are. It follows that
an undertaking has less incentive to undercut the price, if the products are
differentiated.
46
The economic rationale to form technology consortia lies
in the objective to achieve the highest degree of product differentiation
through information exchange. Once this information exchange reaches the
desired degree of product differentiation due to complementary RD
efforts, this will attract additional demand conferring a competitive
advantage on the technology consortium members which maximizes the
profits.
Consequently, members to a technology consortium will continue
their contribution in terms of innovation outlay as this secures product
differentiation, which means profit-maximization. Due to the
interdependence created by product differentiation and complementary
RD efforts, an increase in the number of consortium members will increase
each member's outlay on innovation, its output of the final product and
drive its cost function downward.
47
An increase in the number of
45
This is because the total industry output will be greater under Cournot in an oligopoly
than under a monopoly, which causes the price to be lower. See further Viscusi, W.K. et
al. (2000), at p. 106.
46
See also Viscusi, W.K. et al. (2000), at pp. 109 - 12.
47
The type of behaviour is based on the Cournot Model (1838). See further Baumol, W.J.
(2002), at pp. 102 03. See also Sachwald, F. (2001), at p. 6.
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