How to Asses the Impact of Uses of IP on Competition

Ralph Heinrich

Skopje 26 September 2012

What is market power?

• Market power = ability of one company to affect through its conduct the price which is generally paid in the market for the product

• Hence to determine whether a company has market power, necessary to 1st establish the relevant market

How is market power exercized?

• Market price depends on supply and demand

• The higher the supply relative to demand, the lower the price, and vice versa

• To affect, price a supplier firm will have to affect total market supply; a firm that is a customer in the market will have to affect total market demand

• => firm size and market share are key elements in assessing market power

Why is market power a concern?

• Competition/ anti-trust law basically to protect consumers, to encourage economic efficiency

• If a firm has market power, i.e. power to affect price, it may use this power to raise the market price consumers are paying above what it would be if there was no market power, by restricting supply => customers get fewer goods at higher prices

• Moreover, a firm w/ significant market power may not innovate as much as firms facing fierce competition because it’s ability to raise price enables it to be profitable without innovation

Why is market power a concern?

Defining the relevant market

• Market defined as including all products/ product variants which are inter-changeable, or “substitutes”

• Depends on customer demand

• One common test: would a significant number of customers switch from product (variant) A to another if there was a small but significant non-temporary increase in the price (SSNIP) of A?

• “Elasticity of substitution” between product variants

How to do a SSNIP Test?

• Customer surveys

• Econometric models that use data on prices and sales across products and over time to identify situations where price increases occurred and demand shifted (or not) between products

Changes in Market Boundaries

• What should be considered the relevant market may change as a function of technology

• Example: video conferencing

Assessing Market Power

• Ability to affect price linked to ability to affect total market supply

• Small firms (relative to market size) generally do not have market power because their production capacity is too small to affect total supply => market share and production capacity are measures that can be used

• But even a firm w/ large market share may not have market power if there are other large players because these can compensate for any supply reductions => Herfindahl concentration index

Assessing Market Power

• Ability to affect price is constrained not only by competition from other companies existing in the market, but also by potential competition from companies that might enter the market

• => assessment of barriers to entry is also important:

• Investments needed in plant & equipment?• Distribution networks?• Network effects on the side of customers?• Knowhow?

Assessing Market Power

• Ultimately, the goal of exercising market power is to earn higher profits than would be available w/o market power

• => profit margins are also used to determine degree of market power

Assessing Market Power

• NOTE: IP is intended to provide incentives for innovation by conferring a degree of (temporary) market power, and it does so by creating barriers to entry precisely by restricting the access of potential competitors to critical knowhow!

• So where IP does confer market power, the question is where the line of legality should be drawn

• Answer: compare any particular use of IP to hypothetical situation where owner had merely exercised his unconditional unilateral right to exclude

Impact of IP on Market Power in Downstream Markets

• IP on an input which is critical to a product might confer market power not (only) in the market for the input, but also in the market for the final product, even if the latter is not protected by IP

• Example: Google Motorola Mobility, Case No. COMP M.6381, Google/ Motorola Mobility, Commission decision of 13 February 2012 (Article 6(1)(b) Non‐Opposition) 

• => relevant is not only ability to exercise market power, but also incentive to do so

Google Motorola example

• Google offers Android OS as open source/free to various handset makers

• Acquired Motorola Mobile, a maker of handsets

• Question: would Google use its control of Android OS to create a dominant position in downstream market for handsets?

Google Motorola example

• Definition of markets/evidence on market shares: Google is mainly in online services markets, Motorola in handsets, acquisition does not significantly affect market shares

• BUT: Google’s Android had 30-40% market share in OS for smartphones and tablets in EEA in 2011, projected to 40-50% for next 4 years; followed by Apple iOS (stable at 20-30), RIM (10-20 declining to 5-10, Windows Phone 5-10, rising to 10-20 and Symbian 10-20 declining to 0-5)

• Among OS available for licensing, Android projected at 70-80%, followed by Windows w/ 10-20, and Symbian

Google Motorola example

• Commission assessed whether Google had (i) ability to foreclose downstream competitors, (ii) incentive to do so, and (iii) whether this negatively affected competition overall

• => market investigation, i.e. survey of market participants

Google Motorola example

• Commission decision re. ability to foreclose:

• Google had ability to favor Motorola handsets in access to Android, but this ability was unrelated to the acquisition, i.e. it had existed before

Google Motorola example

• Re. incentive to foreclose:

• Analysis of Google’s business model and sources of profit, including those of Motorola Mobile

• Google’s revenues 96% from online ads; revenues from Android projected to rise rapidly; gross margin on Android far higher than on Motorola handsets; market share of Motorola handsets in EEA below 5%

• Finding that Google has incentive to continue working w/ all handset makers rather than favoring Motorola, i.e. no incentive to foreclose