Antitrust Overreach: Undoing Cooperative Standardization in the Digital Economy

Abstract

Information technology markets in general, and wireless communications markets in particular, rely on standardization mechanisms to develop interoperable devices for rapid and secure data processing, storage and transmission. From 2G through the emergent 5G standard, wireless communications markets have largely achieved standardization through cooperative multi-firm arrangements that likely outperform the historically dominant alternatives of government monopoly, which is subject to informational deficits and regulatory capture, and private monopoly, which suffers from pricing and other distortions inherent to protected market positions. This cooperative process has successfully relied on a mix of reasonably secure patents, quasi-contractual licensing commitments supplemented by reputational discipline, and targeted application of antitrust safeguards against collusion risk. Over approximately the past decade, antitrust agencies and courts have taken actions that threaten this legal infrastructure by limiting patentees’ ability to seek injunctive relief, adopting rigid understandings of the “fair, reasonable and non-discriminatory” licensing commitment, and focusing on collusion risk among licensors-innovators while overlooking (and even exacerbating) collusion risk among licensees-implementers. This incremental erosion of IP and contractual security shifts value from firms and economies that specialize in generating technology inputs to firms and economies that specialize in integrating technology inputs into consumption goods. These entity-level and country-level redistributive effects are illustrated by the origins of the “FRAND” requirement at the onset of the European cellular telephone market and antitrust enforcement actions against IP licensors in jurisdictions that have substantial net IP deficits and are principally populated by firms that operate in the downstream stages of the technology supply chain. The current policy trajectory promotes producers’ and assemblers’ narrow interests in lower input costs while ignoring the broader public interest in preserving the cooperative standardization structures that have supported innovation and commercialization in wireless communications markets.