Abstract
This paper examines the motivations of a patent holder, for example, Qualcomm holding many standard essential patents (SEPs) on modem chips, to implement a bundled rebate program for its customers, Apple for instance, under the risk of violating antitrust law. This study originates from the lawsuit between Qualcomm, Federal Trade Commission (FTC), and Apple. In early 2017, both FTC and Qualcomm’s customer, Apple, sued Qualcomm for violating antitrust law. Qualcomm was alleged to have manipulated “web of contracts” by implementing so-called no license, no chips policy to achieve its anticompetitive purpose. By addressing the case law of antitrust regime related to bundled rebate and loyalty discount, we understand legal risks that Qualcomm might face. Moreover, in this paper, we build a game-theoretical model to explore business reasons why Qualcomm insists on implementing the bundled rebate and loyalty discount program, regardless of latent legal risks. It is shown that Qualcomm might desire to mitigate future loss from price war with potential competitors. Finally, this article concludes with expectations for future studies on the impact of the Federal Court if SEPs and modem chips cannot be bundled together.
Highlights
Bundled rebate and loyalty discount are two traditional incentives to sustain the customer relationship between a supplier and a manufacturer
If we focus on premium long-term evolution (LTE) modem chips, Qualcomm has dominated the market with a share over 80%
Qualcomm pioneered the application of orthogonal frequency-division multiple access (OFDMA) and single-carrier frequency-division multiple access (SC-FDMA) to cellular systems, which eventually became the basis for the 4G standards known broadly as long-term evolution (LTE)
Summary
Bundled rebate and loyalty discount are two traditional incentives to sustain the customer relationship between a supplier and a manufacturer. In early 2017, Qualcomm, one of the leading modem chip suppliers, was accused by FTC and Apple Inc., one smartphone manufacturer and one of Qualcomm’s modem chip buyers, that its bundled rebate and loyalty discount program should violate Sherman Act Section Two.. Why does Qualcomm insist on delivering the bundled rebate and loyalty discount program for Apple Inc., if they are likely to be illegal under antitrust law? We attempt to derive business incentives for Qualcomm to insist on implementing the bundled rebate and loyalty discount program regardless of legal risks.
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