What’s mine is yours

The spirit of intellectual property law is to promote innovations, not to maximize the profit of the copyright holder. For those believe Nintendo owns the copyright of The letter M caps, such that poor little girl should not be allowed to make the caps. Do they think TV schedule is also a copyright material that it cannot be copied freely?

May 28th 2009 – The Economist
When should firms be required to share their intellectual property with rivals?

ECONOMIC policy is rarely uniform on either side of the Atlantic, but the differences in some cases are exaggerated or soon narrowed. That is true of antitrust policy, where there has been a great deal of convergence. The European Commission’s trustbusters tend to take a more cautious view of big global mergers, but the way such tie-ups are assessed is very similar to American practice. In the policing of cartels, the commission has adopted many of the methods and models of its American cousins.

On one antitrust issue, though, the transatlantic gulf has been unusually wide: how to deal with firms with a market share so large as to dwarf their rivals. In high-tech industries, such as computing and telecoms, the power of network effects encourages firms to settle on an industry standard to ensure that gadgets and software are compatible. That gives the owners of the winning standards, such as Microsoft, a great deal of market muscle.

That kind of dominance creates a tension between property rights and antitrust principles. American competition authorities have been loth to compel dominant firms to grant rivals access to their private property, whether physical (as in the case of telecoms networks) or virtual (as with computer code). In their view intellectual-property rights have to be upheld to induce firms to innovate. Patents and copyrights are the rightful prize for new inventions. Trustbusters should be wary of compelling firms to hand over their business secrets in the name of competition.

By contrast, Europe’s trustbusters have acted to free up access to telecoms networks in France and Germany. Backed by the courts, they have required Microsoft to make private information about its Windows operating system available to rivals, who can then compete more readily in software development.

Which view is right? In a new paper* John Vickers of Oxford University surveys the economics literature and concludes that a hands-off approach is far from ideal. Mr Vickers, once head of the Office of Fair Trading, Britain’s main antitrust outfit, says that like many economists he finds himself “rowing in the mid-Atlantic” when it comes to the treatment of dominant firms. American policy is too cautious about treading on big firms’ toes but Europe’s trustbusters may intervene too boldly.

Drawing on recent academic work, Mr Vickers makes the case for intervention on three counts. First, he outlines models that suggest a rival is less likely to develop new products if it cannot share in the profits from the dominant firm’s invention. If the leading firm is free to licence its technology on stringent terms, it curbs the profits of rivals who have to stump up. True, it spurs rival firms to innovate since the prospective pay-off is greater. But on balance, the incentive to innovate is greater where access is granted more freely, because upfront profits are more valuable.

A second argument for reining in dominant firms is that the contest to innovate tends to be keenest where there is a neck-and-neck battle to be the dominant firm. If market leaders are forced to license their know-how on easy terms, that reduces the pay-off from research and development (R&D). But it also allows much smaller firms to catch up quickly. Although profits from any new inventions will be lower, they will be chased more aggressively when competitors are on a similar footing.

Trustbusters may have most reason to trespass on property rights if the dominant firm uses them to stifle “follow-on” innovation. An ideal set-up would reward seminal inventions without strangling their related offspring at birth. That means giving the breakthrough inventor a share of profits from related products while leaving enough left over to make rivals’ R&D viable. If the dominant outfit is afraid a new add-on will make its own technology redundant, it will not deal with competitors on any terms. So trustbusters may have to step in. Indeed, the case against Microsoft in America was that it tried to force Netscape out of the market for web browsers, fearing its rival’s software could be used as a platform to compete against Windows.
From east to west

The literature surveyed by Mr Vickers suggests that if trustbusters act to keep dominant firms in line, that will not necessarily curb innovation. It may even promote it. Economic thinking in this sphere is not so securely fixed as to provide firm guidance on when to intervene. It does, however, call into question the scepticism that guided America’s competition policy in recent years—the idea that trustbusters cannot be certain that their interventions will help, so should back off. That doctrine has been abandoned. Christine Varney, President Obama’s chief trustbuster, gave a speech on May 11th in which she repudiated the “overly lenient” course favoured by the previous administration.

Ms Varney’s remarks suggest that the transatlantic flow of ideas on antitrust policy may now be moving from east to west. Yet Mr Vickers frets that European courts may not exert enough discipline on the commission’s future actions in this area. The court ruling that upheld the commission’s action against Microsoft, in September 2007, suggests that the hurdle for such an intervention is less exceptional than had previously been thought. The “elastic” reading of case law left it unclear in what circumstances a dominant firm must share its intellectual property.

For Mr Vickers the one clear lesson is that intellectual-property rights should not be set too broadly. A precedent for the European case against Microsoft was a 1990s judgment against television companies, which forced them to hand over broadcast schedules to publishers of TV guides. The broadcasters fought the case tooth and nail to preserve their publication monopolies. Yet many may now wonder how such information could ever have been thought of as intellectual property.

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