Transcript WIPO-WTO Joint Workshop Intellectual Property Rights and Transfer of Technology Geneva, 17 November 2003 Competition, IPRs and Development Joseph Seon Hur Korea Fair Trade Commission.

WIPO-WTO Joint Workshop
Intellectual Property Rights and Transfer of Technology
Geneva, 17 November 2003
Competition, IPRs and Development
Joseph Seon Hur
Korea Fair Trade Commission
Contents
I.
II.
Introduction
The Impacts of Competition and IPRs on
Innovation and Development
III. Relationship b/w Competition Policy and IPR
Policy
IV. Licensing Practices related to IPR which need
Competition Review
V. Further Debate Needed in Multilateral
Framework
VI. Conclusion
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I.

Introduction
This presentation focuses on:
o How do competition and IPR spur innovation which is
vital for development?
o What is the characteristic relation b/w CP and IPR?
• Contradictory or complementary?
• In what condition?
o How can CP best respond to IPR related case?
o Needs or items for further debate in multilateral
contexts
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II. Impacts of Competition and IPRs
on Innovation and Development

Innovation is vital engine of economic
development and consumers’ welfare.

Competition policy and IPR share the identical
goal of economic development and consumer
welfare through innovation
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
Competition policy objective of promoting consumer
welfare could be achieved by encouraging efficient
production (static efficiency) and innovative activity
(dynamic efficiency).

Patent law provides patent holder with monopoly right that
may lead to some static inefficiency in the hope of
promoting dynamic efficiency.

A problem arise here as a conflict b/w static and dynamic
efficiency.
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
Economic studies show that a relatively small dynamic
advantage can offset a larger static inefficiency.

For example:

It only takes 5 years for even a 1% annual growth rate in
cost efficiency to offset a 5% static loss due to price increase.

An output handicap amounting to 10% of national product
from static inefficiency is surmounted in 20 years, if the
output growth rate can be raised through more rapid
technological progress from 3.0 to 3.5%, just 0.5% point.
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1. Competition, Innovation, and
Economic Development

Competition spurs innovation:

Competition to win a patent right drives a race to innovate.


Monopolist who does not feel the threat of entry has less
incentive to innovate.


approaching differently, also increasing chance of success
To a monopolist, new products only cannibalize the existing sales
Competitors have more incentive to innovate for acquiring
market dominance.
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The Long Debate on Schumpeterian Hypothesis
• Larger firms innovate more.
• Firms in concentrated markets innovate more.
 Based on (1) economy of scale of R&D
(2) availability of resources of R&D
 Does not seem to reach a final conclusion.
 Some argue for non-linear, inverted-U-shaped
relation b/w concentration and innovation.
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 “What is needed for rapid technical progress is a subtle
blend of competition and monopoly with more emphasis in
general on the competition, and the role of monopolistic
elements diminishing when rich technological
opportunities exist.”
 “There is no simple Schumpeterian relationship across all
industries.”
 “Industries vary too much for one theory to fit all.”
 But Competition alone cannot serve as the sole driver
of innovation.
• Innovator cannot appropriate full benefits from his
innovation without IPR. (problems of free-riding)
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2. IPR spurs innovation in three ways
 IPRs enhance appropriability, excluding free-riders.

Patent rights mitigate misappropriability problem by
granting exclusive rights in innovations.

IPRs increase incentive to innovate.

When innovation is cumulative, strong patent rights may
hinder independent follow-on innovation.

Other appropribility mechanisms, like secrecy, first mover
advantage, learning curve advantage, may also protect
innovator from free riding.
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 IPRs facilitate commercialization of innovation.
 Innovators sometimes may lack commercial ability.
 Patent right enables innovators to contact with investors.
 It makes their information a tradable commodity by
reducing transaction costs and enabling license.
 It also helps to get an advantage of specialization.
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 IPRs encourage disclosure.
 Patent law requires applicants to disclose the inventions.
 The purpose of the disclosure obligation is to further
innovation by sharing information of innovation.
 Issued patent communicates a good amount of
information that can help other inventors including rival.
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3. In some case, patent rights to exclude others
could confer the innovator a market power.

This patent monopoly leads to:





Reduction of production
Higher price and reduced consumer’s options
Social deadweight loss
Strong and effective entry barriers
To the extent that patent production is not needed
to stimulate innovation, the cost of patent may
cause unjustified injury to consumers.
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III. Relationship b/w
Competition Policy and IPR Policy
1. IP law and competition law both seek to promote
innovation and enhance consumer welfare.

Both share common purpose of promoting
dynamic competition and thereby enhancing
consumer welfare.
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2. Competition and patent policies work in
tandem toward the purpose.

Competition policy understands that effective legal
regime of property rights is essential to a competitive
economy.

Patent policy recognizes the value of competition by
limiting life and breadth of patent to balance the need
to encourage innovation and avoidance of monopolies
that stifle competition.

In conclusion, competition and patent policy take
different means to achieve their congruent goals.
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
Most Patents do not confer monopoly power to
their holder.



Most business conduct with respect to patent does not
serve to monopolize power.
Monopoly power which is conferred by patent does not
necessarily create anti-competition problem.
However, there are opportunities for conflict b/w
competition and patent law and policy.
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3. Most conflicts stem from four principal
areas of uncertainty
①
Extent to which competition policy is about short-run
efficiency or long-run dynamic efficiency
②
Whether market power should be inferred from existence
of IPR
③
Certain distinctive economic characteristics of IPR
④
Whether a particular contract, license, merger should be
regarded as horizontal or vertical
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A. Short run or long run?

When competition authority sees the issue in the short-run
perspective, we see the IPR-rendered dominance as a
serious anti-competitive, because CA believes that
consumer welfare is best served by removing impediments
to competition.

But recently this short-run view has been replaced by a
longer-run perspective.

Technical Progress contributes at least as much to social
welfare as does the elimination of static inefficiency.
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B. Whether market power should be
inferred from the existence of an IPR

Strong tendency of CA to treat IP as conferring market
power and therefore as antithetical to competition policy.

Recently this tendency seems to be ebbing.
 CA doesn’t presume that IP creates market power in
antitrust context.
 CA focuses on whether there are close substitute that
might constrain ability of IPR owner to exercise market
power.
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C. Distinctive economic characteristics of IPRs

Fixed cost of producing IPR tends to be very high,
whereas the marginal cost is near to zero.




This means the price of patented goods must remain
above marginal cost.
Price discrimination, charging different prices to
different users may well be output-enhancing and
efficient.
Tying and exclusive territories can be efficiencyenhancing.
IPR can easily be misappropriated.


Serious free rider problems
IPR holders may impose exclusive dealing on a license
to solve this misappropriation problems.
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D. Distinction b/w horizontal and vertical


IP licensing is a way of bringing together
complementary inputs, and transactions involving
complementary inputs are essentially vertical in nature.
IPR licensing can nonetheless have a significant
horizontal element.


Patent pooling
U.S. guidelines: “The Agencies ordinarily will treat a
relationship b/w a licensor and its licensees or b/w licensees
as horizontal when they would have been actual or likely
potential competitors in the relevant market in the absence
of the license.”
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4. The Need for Proper Balance of CP and IPR
A. Shared goal to enhance the consumer welfare
through dynamic competition and innovation.
B. Competition policy should have an optimal level
of enforcement and economically reasonable
rationale.

Both over- and under-enforcement of competition law
would seriously undermine the incentive to innovate
thereby reducing consumer welfare.
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 Proper application should avoid both (1) excessively
stringent enforcement approach which lessen innovation
and (2) weak or ineffective application of CL which leads
to abusive dominance.
 Either approach could have adverse effect on in innovation.
 Appropriateness of
 Rule of reasons analysis
 Use of filter to identify harmful practices
 Importance of non-discrimination and transparency
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C. IPR should also have optimal life and breadth
of patent protection





Too broad patents may distort incentive to innovate
and incur unjustified cost to consumer.
If an invalid patent which is granted by systematic
error confers a market power,it can deprive consumers
of benefit of competition.
Broader IPRs are producing higher than necessary
barriers to entry and encouraging more cross-licensing
than is optimal. (Ex: biotechnology, business methods)
Strong IPRs strengthen a market position against
independent follow-on innovation which is more procompetitive and holds major proportion.
Market power in one market could leverage into a
position in another market through for example tying.
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D. Competition and patent policy are bound together by the
economics of innovation and intricate web of legal rules
that seek to balance the scope and effects of each policy.


Errors or systematic bias in the interpretation or
application of one policy’s rules can harm the other
policy’s effectiveness.
A challenge for both policies is is to find the proper
balance of competition and patent protection.
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5. Approaches for competition treatments
of IPRs

Gallini and Trebilcock (1996) recommend the following set
of principles for guiding competition policy toward
intellectual property.
 P1: There should not be a presumption that an intellectual
property rights create market power.

P2: Competition policy should acknowledge the basic
rights granted under patent law.

P3: A licensing restriction should be permitted if it is not
anticompetitive relative to the outcome that would result
if that license were proscribed, otherwise an evaluation of
potential efficiency effects of the restriction on the
pricing and diffusion of IP should be made.
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 P1: No presumption that IPR creates market power

Most products face a large number of substitutes.
(Only 27% show no alternatives, 29% cases had over 10
competitors)

In case a patent does confer market power, it is not in
violation of competition law.
 It is same as that IP acquired through superior skill,
foresight, and industry should not be condemned.
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 P2: The basic rights under the patent law should
be respected.
 Patent law ensures the existence of property rights
while competition policy restricts the exercise of those
rights.
 Where exclusion of others from using IPR extends
market power beyond that intended by patent law, then
competition policy may intervene. For example, in case
that patents are accumulated for the purpose of
eliminating competition.
 Existence of IPR does differ from exercise of it.
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 P3: A licensing restriction should be permitted
if…..

Acknowledges the roles that competition policy
has to play in promoting the efficient diffusion of
technology and pricing of goods.

But licensing may not always socially desirable.


Excusive dealing which forecloses the market
Patent pooling that facilitates cartel
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IV. Licensing practices related to IPR
which need competition review
1. Horizontal effects




Pooling and cross licensing
Exclusive territories
Grantbacks
Horizontal acquisitions
2. Vertical effects




Exclusive dealing
Royalties based on total sales
Tying arrangements
Vertical acquisitions
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3. Other enforcement issues

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Compulsory licensing
IPRs of dubious validity
Innovation market
Standard setting and networks
Vertical price restriction
Safety zone
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V.
Further Debate Needed in Multilateral
Framework
1. The time is ripe for the debate.
 Knowledge-based, information based economy
prevails.
 New economic learning has been challenging the
old policy in competition and IPR.
 More deepened globalization needs a proper
governance of trade.
• Danger of new mercantilism
 Accumulated experience of member countries in
treatment of licensing cases.
 Growing number of developing countries are
introducing competition laws
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2. Some specific issues that needs
further multilateral debate
 Communication channel b/w competition agency and
patent agency
 The appropriate scope of patent in the area of overbroadened patent
 Special situation of developing countries in technical
transfer and licensing
 Comparative approach to treatment of licensing
arrangement of member countries
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 The role of IPR in network industries especially
refusal to license and essential facility doctrine
 New strategy of acquisition of IP to build up entry
barrier
 The concept of innovation market and potential
competition theory
 International market segmentation and price
discrimination and doctrine of exhaustion in trade.
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VI. Conclusion

Both intellectual property and competition policy have
important roles to play as cornerstones of a healthy market
economy, especially in promoting innovation.

Competition law is needed to prevent certain abusive
practices involving IPRs. Countries not having competition
laws deprive themselves of an important tool to prevent
these abuses.

WTO can play a useful role in promoting understanding of
the issues internationally. This would be an important aspect
of ensuring that the system keeps up with and is welladapted to the modern knowledge-based economy.
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