Wednesday, September 11, 2013

Day 1 of University of Florida Workshop on Standard Essential Patents and FRAND: Yoo on "Public Good Economics and Nondiscrimination in Patent Licensing"

Professor Christopher Yoo's paper is a comment on the Carlton/Shampine proposal regarding the definition of "nondiscriminatory."  The Carlton/Shampine proposal is subject to limitations that it takes existing entitlements as a given and does not make any efficiency claims; we just try to replicate the ex ante bargain.  Yoo argues that "public good economics provides an analytical framework for assessing whether" price discrimination is efficient.  Contrasts baseline case of private goods with baseline price of public goods.  With respect to public goods, consumers must necessarily consume in the same magnitude; they are "indivisible."  Samuelson condition:  the sum of marginal benefits must equal marginal costs.  Leads to inefficient production of public goods; consumers have no incentive to reveal their preferences truthfully.  Incentive incompatibility problem.

This suggests we should support value-based price discrimination.  Charge everyone a different price based on the marginal revenue they derive.  if we do, we satisfy the Samuelson condition.  Value-based price discrimination a necessary condition for efficient production of public goods.

"Complications:  vulnerability of inventors to being held up; moral hazard from ex post below-cost pricing; strategic avoidance of funding fixed costs; bundling as a potential way to extract surplus."

Professor Roger Blair:  Difficult issue with regard to SEPs is how to divide up the surplus and avoid the Cournot complements problem.  How does a third party put together a portfolio of these patents?  You need to value them first before someone can acquire them.  When you condemn land at FMV and transfer it to a development, the original landowner doesn't get the value of the land as a shopping center but as pasture.  Is any division of surplus arbitrary?  Tying it into Yoo, with public goods you have to have different prices to reach agreement.

My comment:  Consumers consume the same amount of some public goods but not others, unless we define consumption in an odd way.  I can go to the park or stay home.  I can use the highway or not.  I guess I have no choice about some public goods, like national defense.   Yoo:   point is not that everyone must consumer, but everyone who consumes gets the same as everyone else.  Me:  but some use the patent more than others.  Yoo:  from a technology standpoint, everyone gets the same functionality, e.g., the same software program.

Page:  Aren't there proxies for estimating subjective value?  Yoo:  yes . . .  

Hylton:  When I try to draw the analogy to the public goods analysis, problems.  Classic public good is national defense.  If I'm interested in licensing some patent, the value is driving me.  But there is rivalry in the value component of a good that is different from, say, national defense.  Yoo:  even if you solve the problem that only people who pay for the good get it, nonexcludability is a separat problem from the valuation problem.  Need to charge people different prices based on intensity of preferences.  Hylton:  club goods analysis more relevant?  Yoo:  I don't see it in patent but possibly in copyright.

Zheng:  difficulty in seeing connection between analysis and conclusion . . .   Yoo:  can't charge all same price, because will exclude inframarginal consumers.

Page:  in the case of SSOs, they're trying to extend the adoption of the standard; pricing reflects that goal.  Many of the patentees are on both sides.  Yoo:  but if you're not a repeat player, can be exploited by other type of opportunism, give it away for free and undermine incentive.

Carlton:  Conflict you're pointing out is that economists usually like price discrimination.  But with SSOs, there's a holdup problem. Fact there is a FRAND requirement suggests they want some constraints when they confer market power.  With standardization, the market power is not created by the patent holder.  SSO is the source of the additional value creation.  Yoo:  lots of standards aren't adopted.  On patent exhaustion, can't have it or you destroy price discrimination.  Carlton:  Correct economic analysis might be to have patent exhaustion in the standard-setting framework.

Haw:  I take your point to be revealing preferences pre-FRAND, not on basis of standardization.  Yoo:  subject to Dennis's point that when you put things together the value may change.

More general discussion of the first-sale doctrine and restraints on alienation followed.

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