Competition law is a fundamental part of the ground rules of the market economy and economic based development of competition law has become essential. The question John Vickers (2009) asks is 'When, if ever, should competition law require a firm with market power to share its property with its rivals?' Though rights such as copyrights and patents give the holder an exclusive right to sell or license, it is important that they do not abuse their power if in a position of dominance in the market.
Property rights are essential to any market economy. The stronger and clearer the property rights, the more likely are efficient prices in trade. Without the right to exclude others from tangible resources, (by putting physical property rights in place) the 'tragedy of commons' will occur. William Foster Lloyd, a 19th century mathematician, showed that as the population increased the pasture would inevitably be destroyed. With no property rights in place, a group or firm would use the pasture with no limits, with the goal of increasing their own wealth. However, once a resource is being used at a rate near its sustainable capacity, any additional use will reduce its value to its current users. As a result, each user will increase their usage even more to maintain the current value of the resource to them, until no value remains. [1]
On the other hand, The Coase Theorem states that if there are clearly defined property rights (and in the absence of transaction costs) free negotiations should eliminate any distortions due to an externality and so result in the optimal outcome. [2] Coase developed his theory when considering the regulation of radio frequencies. Radio stations competition on the same frequency would interfere with each other's broadcasts. In 1959 Coase proposed that as long as property rights in these frequencies were well defined, it ultimately did not matter if adjacent radio stations interfered with each other by broadcasting in the same frequency band. It would be in the interest of the station with the highest success and economic gain to pay-off the other, so to avoid any further interference. As a result the right to broadcast would go to the one with the most success, which may be measured by the number of listeners, the one who has attracted a more favourable market or the number of sponsors or businesses interested, making the most profit for the station and producers. This will put both companies in an advantageous position once they come to this agreement. [3]
ABUSING A POSITION OF DOMINANCE
In the US there is much debate over what the law against monopolization is and should be. Conduct preventing or restricting competitors has contributed to an abuse of dominance. Where there is no competition, or none to be eliminated, dominant firms should work as though they are constrained by competition. This allows better deals to be offered to customers. Both the possession of monopoly power and the "wilful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen or historic accident" [4] corresponds to dominance and abuse in market power. [5] This can be done through discounts and rebates, predatory pricing, margin squeezes, and selective price cuts.
A main issue regarding abuse of dominance is that of the 'discounts and rebates'. A recent case of discounts and rebates arose in a case against British Airways and their performance reward system. It encouraged agents to sell British Airways tickets, which became more favourable to agents but it restricted their freedom to work with other airlines. This case works toward eliminating the competition and therefore leading to dominance.
Predatory Pricing only serves to be profit maximising because of the exclusionary effect it causes. This is when firms offer deals to customers that are alleged to be too good. A recent case of this was in 1999, when American airlines had a case against them by the US Department of Justice, who claimed the American Airlines had acted in an unlawfully predatory way to entry by rivals on routes connecting to its Dallas hub. [6] The argument was that it would have been unprofitable for the company if it wasn't for the exclusionary effect that was caused.
Another example of a firm abusing its dominant position in this way is France Telecom, whose division, Wanadoo, had eliminated competition in the market for high-speed internet through the application of discriminatory tariffs against downstream rivals. [7]
Margin squeezes occur when vertically integrated firms with market power sell wholesale inputs to rivals in a downstream market, which may 'squeeze' the margin available to rivals by setting the price high relative to cost or by selling the product at a retail price which is lower than the wholesale price. The result of the market squeeze would be making the entry of the downstream firm unprofitable. A recent case in 2003 presenting such abuse of a dominant position, was when the European Commission found that Deutsche Telekom had set the wholesale price of local loop capacity to competitors, at a time that was higher than the retail price being offered to the final customers. As a result the wholesale margin is negative, which makes it unprofitable for rivals, regardless of their level of efficiency.
Selectively cutting prices takes place when a firm nearing a monopolistic position reduces their prices to match those of their competitors or new entrants into the market. In some cases, this is aimed at eliminating competition and therefore is considered abuse of market power.
The Microsoft Case
Microsoft was accused of abusing its position of dominance in March 2004 by refusing to supply information to rivals in the market of workgroup server operating systems and by tying in Windows media player, and more recently (Internet Explorer)with the Windows client PC operating system. This posed the question whether it was a competition law violation for Microsoft, having a dominant position in the market, to have not shared their intellectual property with rivals. [8]
The complication is that refusal to deal in IP in itself is not abuse. However, if the refusal to deal is unjustified, when there could be a potential demand as a result, or there may be an exclusion of competition, then it may be considered abuse. This is a case where IPR issues may arise as these factors may be argued.
In a competitive race, stronger intellectual property rights (IPR) could increase the outcome, or could have the opposite effect of blocking subsequent innovation. [9] Complications arise when a series of competitors endeavouring to innovate occurs, rather than in a one-shot setting. Good welfare, however, is not always delivered by successful innovations. Below are examples which were presented in a paper by John Vickers (2009), which show why innovation is not necessarily maximised by stronger IPRs.
THE FRONT LOADING EFFECT
Segal and Winston's [SW] (2007) said, "Unfortunately, the effects of antitrust policy on innovation are poorly understood". Their analysis of antitrust in innovative industries focuses on policies that restrict incumbent behaviour towards new entrants. He gives the example of two firms in a duopoly phase. In their basic model, the current incumbent monopolist, A, is confronted by an innovating rival, B, which has undergone research and development (R&D). The rival is then assumed to replace A as the incumbent monopolist. Segal and Winston show that if a lump-sum license fee, f, was charged to the entrant, the value of the incumbency would be raised, as A would be encouraged to innovate, but B's incentives will be decreased as their future profits will be discounted at a higher rate. Thus the profit shifts from the entrant to the incumbent in the duopoly phase, which presents the front-loading effect Therefore, though laissez-faire towards the incumbent, the value of incumbency may be maximised and the innovation incentives become limited. [10] Without the rival, however, A would gain dominance in the particular market and may eventually abuse its power. IPR rights therefore should be reinforced to encourage the incumbent to share its knowledge and prevent this from happening.
NECK AND NECK EFFECT
When firms are neck and neck, rather than asymmetrically placed, rivalry may be more intense. Following Aghion et el (2001), considering a duopoly, with a current profit flow per period, πn. Where n represents the number of technology 'steps' ahead of the rival. The R&D model has a cost and probability keeping ahead by one step, but a follower can advance with zero R&D. This reflects the weakness of IPRs.
When the firms are level (n=0) ,
This shows that R&D efforts are decreasing in IPR protection. However a firm without IPR may increase R&D.
Poisson:
Let the flow cost of advancing from a level position into the lead with Poisson probability rate, x, be c(x). Therefore expenditure rate of c(x) gives rise to probability x.dt that an advance will be made in the time interval. [11]
Let the flow cost catching up from behind with probability rate (y + h) be c(y). Therefore expenditure rate y gives rise to probability (y+h).dt of catch up in the time interval.
h is a measure of weakness of IPRs as it is always greater than 0, even if the firm has not undergone any R&D. Decreasing the incentives to innovate, however, increasing the proportion of time, the firms are level, competing to get ahead.
FOLLOW-ON INNOVATON
IPRs may decrease the promotion towards innovation due to sequential complementary innovations in follow-on innovations. The incentive problem is emphasised in a paper by Green and Scotchmer (1995), which considers a case where there are two stages on innovation:
Stage 1: Primary innovation - which acts as a platform. eg. An operating system.
Stage 2: secondary innovation - which could be an application requiring access to the source code of the operating system in the example above.
The negative possibilities of the above process are that IPRs need to encourage both innovations, but strong protection of the Primary innovation may block the incentives for secondary innovation, or lead to inefficiency. The IPRs therefore may lead to the abuse in dominance.
The issue was explored by James Bessen and Eric Maskin (2009). The model suggests that when a competitor joins the 'platform' to follow on from the primary innovation, they must pay a licence fee. However, committing to licence fees ex ante will tend to be lower and will require commitment, bur because of this, investing in secondary innovation is favoured over primary innovation. On the other hand, ex post, though no commitment is required, there is a risk of extracting higher value given the primary innovations, which leads to decreased incentives for secondary innovation.
CONCLUSION
Firms' ownerships of Property Rights help them sustain a dominant position in the market. In particular, Intellectual Property Rights are important to increase the value of the final prize as a result of innovation. However, it is important to take into account the possibility of innovations by another firm, which with an already dominating firm's property or information, could potentially meet consumer demands. Though IPRs can reinforce a firm in its position of dominance, it can also increase its abuse of dominance which demonstrates the issues with these patents.
