Antitrust Implications of Technology Consortia

Master's Thesis, 2003

110 Pages, Grade: Distinction (14 of 15)




2.1 The Incentives Mechanism
2.2 Contrasting Stability Issues
2.2.1 Formalization of the Arrangement
2.2.2 Penalizing any Innovation Shortfall
2.2.3 Ejecting the Cheating Member
2.2.4 Sustaining the Consortium despite Default
2.3 Benefits and Risks
2.3.1 Risk Diminishing Factors
2.3.2 Risk Increasing Factors
2.4 Issues Relevant for Assessment

3.1 General Standard Setting Cooperation
3.2 Specialised Cooperation - Technology Consortia
3.3 Competition Impact Assessment
3.3.1 Market Power
3.3.2 Cooperative Momentum
3.3.3 IPR Reliance
3.3.4 Ancillary Restraints
3.4 From Policy to Competition Law

4.1 Article 81: General Scope
4.1.1 The Ins and Outs under Article Induced Collusion Limitation of Technical Development
4.1.2 The De Minimis Exception
4.1.3 Relevance of Block Exemptions Research & Development Agreements Regulation Specialisation/Production Agreements Regulation Technology Transfer Agreements Regulation Appropriateness of Block Exemptions
4.2 Self-Assessment under Article 81(3)
4.2.1 Economic and Other Benefits
4.2.2 Consumer Benefits
4.2.3 Indispensability
4.2.4 No Elimination of Competition
4.2.5 Article 81(3) in Retrospect
4.3 Issues Requiring Clarification under Article
4.4 Article 82: General Scope
4.4.1 The Ins and Outs under Article Abuse: Submarine IPR Access Conditions: IPR as Essential Facility?
4.5 Appropriateness of the Essential Facilities Doctrine:
4.6 Beyond IMS Health - Future Application
4.7 Reconciling Competition Law with Intellectual Property Law: Formulating a Technology Consortium’s IPR Policy





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.

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.


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 R&D 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-

organizational cooperation and the role these organizations play in the different steps of the innovation process.4

Box 2.1.: Technological Innovation Process

Abbildung in dieser Leseprobe nicht enthalten

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 R&D. Without relinquishing a firm’s own R&D, it can benefit from the important know-how exchange in the consortium. Technology consortia may work on standard-setting6 ensuring interoperability7, develop improved production and process technology8, 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 R&D 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 R&D 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 R&D 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, the focus will necessarily be placed on the complementary nature of innovative findings.

2.1. The Incentives Mechanism

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 R&D 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. 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 R&D 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 R&D, 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. R&D 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 study17, 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. 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

2.2. Contrasting Stability Issues

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.

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 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. Centrafarm1978 ECR 1139 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 R&D 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. Benefits and Risks

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 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.

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 R&D 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 Technologiem ä rkten ’ 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.

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 R&D. 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 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 R&D 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 R&D 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 consortium members will also mean reduction of production costs that contributes to decreasing total costs.48

2.3.2. Risk Increasing Factors

Despite these positive welfare consequences, these are only a tendency in increasing outlay on innovation, increase output and reduce costs which will not materialize, if a technology consortium pervades into collusion with price fixing or a cut in innovation outlays, or both. Clearly, if a technology consortium is only used as a smokescreen for fixing prices, dividing market shares, or excluding a competitor, then it shall attract the full sanction liability for infringing Article 81.49

More difficult to assess are those cases that are not overtly exclusive, but which have exclusionary effects through membership or technology selection procedures.50 An anti-competitive practice51 may also be constituted in the inclusion of irrelevant IPR and the provision for respective royalty payments, which may raise the price of the final product.52 Royalty- rent seeking behavior can also be restrictive of competition, if it is to undermine the competitive efforts of the technology consortium. This situation often occurs in respect of a technology consortium’s IPR policy and its treatment of undisclosed IPR as illustrated by the recent Federal Trade Commission’s decisional practice. In these circumstances, a consortium member either contributes its technology, or votes to accept another member's submission of technology, but fails to advise that it has a pending patent. Subsequently, on issuance of the patent, the consortium member holding the patent seeks payment for the use of its technology. This scenario is also referred to as submarine IPR.53

2.4. Issues Relevant for Assessment

As the foregoing discussion of the economic reasoning of technology consortia has shown, interoperability and profitability build the basis for a consortium’s existence. Factors which follow from this basis include cost- reduction and speed that allow for higher net benefits and quicker results for the participating firms. Other firms, which do not cooperate are put at a cost-disadvantage and can not generally compensate for the loss, unless these firms exhibit scale economies or other special circumstances that lead to decreasing costs.54 Technology consortia also exhibit a form of risk insurance against unsuccessful innovation attempts of individual consortium members, which add to the attractiveness of cooperation. Finally, it is the interoperability and compatibility with other products and systems that a consortium experiences as main drivers for its success.

It follows clearly that technology consortia are generally more stable in pursuing their activities that are generally beneficial, unlike cartels, which are detrimental in their welfare implications. Technology consortia can revert to formalization of the exchange arrangement, which includes a sophisticated mechanism that provides for compensation in the event that produced innovation is below the targeted value. Although there is a problem of quantification, this is minimized through repeated practice of compensation among firms.

Ejection of the cheating member whilst preserving the sustainability of the consortium is yet another distinguishing feature. An ejected member is most likely to lose out, but the remaining members can still carry on their exchange activities. The potential of entry competition suffices to further stabilize the consortium. All these features aim at a strengthening of the positive feedback, which is to secure the cooperating firm’s spending on innovation. If this positive feedback succeeds, the Cournot price of the finalized product will be lower than a monopolistic price because the individual member firms of the consortium are only concerned with their own profits as opposed to industry profits.

However, one needs to be careful as to when this positive feedback does not arise and instead translate into detrimental price-fixing, cuts in innovation expenditure and market share division. These are the negative effects resulting from collusion which need to be alleviated. In general, the differentiation of individual products and interoperable products need to be considered as desirable, whereas the collusive development of a prospective de facto industry standard or their anti-competitive effects needs to be avoided. Similarly, anti-competitive rent-seeking behavior of individual consortium members needs to be categorized as abusive.


The discussion of the economic reasoning of technology consortia has helped to delineate the modus operandi of a ‘healthy’ technology consortium, but one must still distinguish practically a technology consortium from a collusive and anti-competitive cooperation with its detrimental welfare implications. In dealing with technology consortia may it be business, their advisers or competition authorities, it is important to acknowledge that the research and development of a consortium is complementary to the member firm’s own R&D. The positive feedback mechanism that has been deduced from the discussion of the economic reasoning is illustrated in the box below and should be borne in mind in deriving the appropriate policy implications.

Abbildung in dieser Leseprobe nicht enthalten

Box 3.1.: The Positive Feedback Mechanism in Technology

Abbildung in dieser Leseprobe nicht enthalten

It is essential to be aware of the incentives that initiate the positive feedback as well as the interaction between the consortium and its member firms. As regards the interaction, the focus should be on the procedures. How is the consortium composed? What are the individual member contributions in terms of staff and other resources? How is the technology transfer organized and how is the access to results determined? What are the internal and external factors that impact on the competitiveness, stability and momentum of the consortium? The latter encompasses factors such as entry competition, IPR reliance, market share, and restraints. In order to answer these questions, the distinction between general standard-setting cooperation and specialized cooperation as two forms of technology consortia is made. On the basis of a real-life example under each category the relevant criteria for antitrust analysis can be discerned. It also illustrates as to whether the positive feedback can be ascertained in the individual setting.

3.1. General Standard Setting Cooperation

Whilst the general standard-setting cooperation, works towards developing an open industry standard, the specified work within a technology consortia may either work on technical enhancements or process improvements. Standards must be distinguished according to the respective industry in which they are set. Thus, the present thesis is primarily concerned with standards that allow interoperability in a network market. The mere fact of compatibility is part of a social benefit since it allows users to interact. By contrast, standards in the durable goods industry such as health and safety standards are standards which allow only for product intrinsic value.55

Any general standard-setting cooperation must be evaluated against whether it is based on objective criteria and a fair procedure. This is the approach taken by the US courts56 and this appears to be sensibly followed in the EU.57 However, the recent ECJ case58 could go one step further by requiring that not only must the membership rules be objective and sufficiently determinate, but also capable of being applied non- discriminatorily.59 This is presumably to prevent certain undertakings to bias the process.60 In assessing the objectivity and fairness of the membership rules any economic incentives to restrain competition need to be balanced against the legitimate standard-setting efforts.61 Cooperative efforts are likely to be successful in promoting efficient and non- discriminatory technological standards if (1) there are net benefits from standardization; (2) each party's benefits from promoting standardization outweigh its costs; and (3) no party has a vested interest in any particular standard.62 As to how objective criteria and a fair procedure translate into practice can be deduced from the Bluetooth Special Interest Group (SIG) experience.63

Abbildung in dieser Leseprobe nicht enthalten

Box 3.2.: Case Study - Bluetooth SIG

Bluetooth works as a trade association developing standardized means for wireless products to be interoperable. Standardization of technology is a crucial process to allow for interoperability of a range of portable products including notebooks, mobile phones, handhelds, MP3 players and a number of other external devices. Bluetooth SIG is an open platform with three levels of membership.

Abbildung in dieser Leseprobe nicht enthalten

At the top of the hierarchy are the promoter members with currently nine members including leading firms from the telecommunications and technology industries (NOKIA, Motorola, Microsoft, IBM and others). They decide on the strategic and technical development issues and devote for that purpose the requisite staff and resources.

Associate members may then use any trademark licenses and published Bluetooth specifications against a payment of an annual membership fee. Furthermore, they may work with other associate or promoter members to develop enhancements to the specifications.

At the lowest level and for free membership are the adopter members who may use the published Bluetooth specifications and its trademarks. However, they do not have the opportunity influence unpublished Bluetooth technology. Membership entails observance of the strict antitrust agreement which prohibits any exclusion of competitors by means of an agreement or concerted practice. It also prohibits any collusion of competitors that constitutes a restraint of trade such as:

- Agreement on prices
ƒ- Territorial and customer allocation ƒ Refusal to deal
ƒ- Predatory pricing.

Furthermore, it prohibits any sort of communication at Bluetooth meetings that relates to prices, conditions of sale, volume of production, territories, customers, credit terms, sales, marketing or distribution with a view to excluding a competitor. For the purpose of further implementing Bluetooth specifications a cross-licensing procedure exists.


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. , 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.

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Economic Reasoning, Competition Law and Intellectual Property Law Issues.

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. ‘ R&D Coopaeration and Competition ’ in Brookings Papers on Microeconomics (Washington, D.C., Washington: Brookings Institutions, 1990), at pp. 137 - 203.

© Andreas Seip 2003. September 1, 2003.


6 See further the MPEG example in section 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 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.

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

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.

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 , 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 , 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.

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, 3rd Edition, 2000), at p. 120.

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.

28 Baumol, W.J. (2002), at p. 108.

29 Ibid.

30 ibid.

31 Viscusi, W.K. et al. (2000), at p. 120.

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 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.

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

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.

41 Shapiro, C. ‘ Navigating the Patent Thicket: Cross Licenses, Patent Pools, and StandardSetting ’ 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.

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.

48 Baumol, W.J. (2002), at pp. 103 - 04.

49 Similar liability consequences are followed in the US. See Guidelines, section 1.6.

available at downloaded January 2, 2003. See also Folz, C.H. (2002), at p. 263 and possible difficulties in proving exlusionary effects resulting from the pricing of royalties in patent pools.

50 See below section 3.1. General Standard-Setting Cooperation.

51 Anti-competitive effects are to be understood as the ability to raise prices above the supra-competitive level and to restrict output. In respect of the latter, the restraint of R&D of a consortium could in turn restrict output.

52 See below section 3.3.3. IPR Reliance.

53 See Guidelines, section 1.6. available at downloaded January 2, 2003.

54 For example, factors such as network effects and instant scalability discussed in Seip, A. (2002), at pp. 12 -27.

55 See Lemley, M.A. (2002), at pp. 1897 - 1898. Other authors equally follow that distinction see Koenig, C. et al (2002), at p. 620; Lind, C.R., Kleymenova, A.V., Miauton, M. and Muysert, P. ‘ Report on Mutliparty Licensing ’ (London, Great Britain: Charles River Associates Ltd., 2003), at p. 84 (hereinafter, CRA Report, 2003).

56 See further the US Supreme Court Case Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988).

57 See Retel 1988 OJ 1991 L121/1 requiring objective criteria as regards membership with an appropriate appeals procedure. By way of analogy on rules of cooperatives see further Bellamy, C. and Child, G. European Community Law of Competition (London, Great Britain: Sweet & Maxwell, 2001), at §§ 4-110 to 4-114.

58 M é tropole T é l é vision (M6) and others v. Commission2001 ECR II 02459.

59 This followed in Commission, ‚ Guidelines on the Applicability of Article 81 of the EC Treaty to Horizontal Cooperation Agreements ’ OJ 2001 C3/02, at §§ 163 and 176.

60 Membership rules as well as the IPR rules and how these are enforced determine whether a standard is indeed open. See also Lemley, M.A. (2002), at p. 1894.

61 Rule of reason approach specified in case Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988), at pp. 500-501. See also Valentine, D.A. ‘Industry Self- Regulation and Antitrust Enforcement: An Evolving Relationship’ FTC Speech before the Interdisciplinary Center Herzlia, Arison School of Business and the Israeli Antitrust Authority, Seminar on New Developments in Antitrust Policy, IDC Campus, Herzlia, Israel of 24 May 1998, at section III Current Enforcement Principles, available at, downloaded 2 January 2003.

62 Ibid., at section V Agency Enforcement.

63 The Bluetooth case corresponds to the Stack example in the Commission, XXVII. Report on Competition Policy 1998, p. 153 by requiring open membership and no obligation to buy certified components. The Commission’s Annual Reports on Competition Policy can be accessed at .

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Antitrust Implications of Technology Consortia
University of Bonn  (Centre for European Integration Research, Bonn)
Centre for European Integration Research, Bonn
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The thesis examines the economic importance of technology consortia as a crucial horizontal cooperation method in innovation markets by looking at incentives and risks that impact on a firm's competitive advantage in rapidly changing industries. After having discussed the policy implications in terms of market power, intellectual property rights and cooperative practices the legal issues under European competition law (Arts. 81 and 82) are analysed including the scope for compulsory licensing.
Antitrust, Implications, Technology, Consortia, Centre, European, Integration, Research, Bonn
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Andreas Seip (Author), 2003, Antitrust Implications of Technology Consortia, Munich, GRIN Verlag,


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