Transcript "Weak" Model of Market Power Presumption

A "Weak" Model of Market Power
Presumption:
IN-BETWEEN INTELLECTUAL
PROPERTY LAW
AND ANTITRUST LAW
Weak Market Power Presumption
Contents
 Introduction
 Part One: Tension and History
 Part Two: Main Arguments concerning the Market
Power Presumption
 Part Three: why is the Market Power Presumption
Needed?
 Part Four: a "Weak" Market Power Presumption
 Summary
Weak Market Power Presumption
Introduction
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What is the Market Power Presumption ?
What is the Market Power Presumption ?
 Significant market power is a crucial element in
determining the existence of a monopoly (or
dominant position)
 The Market Power Presumption is a judicial
presumption which states that:
in the absence of evidence to the contrary, IP rights
which are patent protected confer significant market
power
Weak Market Power Presumption
Part One: Tension and History
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The Tension Between IP Law and Antitrust Law
The History of Market Power Presumption in the US
The Market Power Presumption in Israel
The Market Power Presumption in Europe
The tension between IP law and Antitrust
 The importance of IP, notably patents, in modern
economy
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Public good
The law grants a “monopoly” to the patent holder
 The rise of Antitrust (competition) in recent years
 The development of the economic approach
Weak Market Power Presumption
The tension between IP law and Antitrust
IP Law
 Maximizing social
welfare through
Innovation
 “Monopoly” over the
invention
Antitrust Law
 Maximizing social
welfare through
encouragement of
Market Competition
 Reduction in prices,
increase of production
quantity and
encouragement of the
development of goods
The right balance
Weak Market Power Presumption
The History of Market Power presumption in US
First period (1870-1910)
• Sherman Act 1870
• A patent granted a
legal monopoly, and
therefore conferred
market power upon its
holder
• Within the IP rights
realm, all practices
were considered legal
per se.
Second period
(1910- late 1970’s)
• Nine No-No's
• A patent confers
market power upon its
holder
• Not all practices
within the IP rights
realm are legal per se,
but rather some
practices are
considered anticompetitive prima
facie.
Third period (late 1970’snowadays)
• AGLIP
• IP rights do not confer
market power upon its
holder, even more so,
IP rights suggests that
there is no market
power to its holder.
•There are no illegal
actions per se, and every
practice is scrutinized,
once it is proven that
the IP holder has
market power
The History of Market Power presumption in EU
 Shifted from a per se approach to a more economic-
oriented regime – “Rule of Reason”.
 No market power presumption
 In patent tying agreements
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Restrictive agreements (article 81, EC)
Abuse of dominant position (article 82, EC). Dominant position
presumption – proving above 20% market share
 Using structural factors, among them the existence
of a patent, to prove market power
Weak Market Power Presumption
Part Two: Main Arguments
concerning the Market Power
Presumption
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Market-Power in the Antitrust Sense
The price of IP goods is expected to be substantially
higher than its marginal cost
Is there an Empirical basis to the market power
presumption?
Market-Power in the Antitrust Sense
 Different terminologies:
Monopoly in
the Antitrust
sense
Small
Monopoly
Market
Power
Economic
Monopoly
Monopoly
in the
Patent sense
Weak Market Power Presumption
Market-Power in the Antitrust Sense
 The different terms are not so different and are
causing confusion:
"The ability profitably to maintain prices above, or output below,
competitive levels for a significant period of time." (Horizontal
Merger Guidelines; AGLIP)
"[W]hen the deviation of price from marginal cost is trivial, or
simply reflects certain fixed cost, there is no occasion for antitrust
concern, even though the firm have market power in our sense of the
term“
(R. Posner)
 A deviation from the marginal price defines the
monopoly
Weak Market Power Presumption
The price of IP goods is expected to be
substantially higher than its marginal cost
 A patent as public good (copied, replicated or
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imitated easily)
Usually the marginal cost is close to zero
High sunk costs (R&D)
Example for market power (Lerner Index): L  ( P  MC )
P
Ex-ante the investment in a patent accounts the
price above the marginal cost:
Two companies invest $100 each in research and development in period 1. In period 2
there is a 50% chance to develop a product and get $250 or to fail producing it and get
$0. The return over the investment, ex-ante, for each one of the companies is 25%. ;
However, the return over the investment, ex-post, is 150%. A rational investor will
invest money only when the projected price could be higher.
Weak Market Power Presumption
Is there an Empirical basis to the market power
presumption?
 95% of the patents have no economic value.
 The Market Power Presumption is a judicial
presumption; therefore, it is used in courts when a
case is litigated
 Patents that get to court have, usually, economic
value.
 IP and Antitrust cases often (mainly in the US) have
higher litigation expenses than other fields
Weak Market Power Presumption
Part Three: Why is the Market
Power Presumption needed ?
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The efficiency parameter
The cost of a mistake, when anti-competitive restriction
are made on an entity without substantial market power
Other Arguments Against the Market Power
Presumption
The efficiency parameter
 The process of proving market power is expensive
 Relevant market definition
 SSNIP: small but significant non-transitory increase of price
 The process of proving market power is complicated
 The substitutes to the formal proof of the relevant
market and of the monopoly in this market can be
found by the defendant in lower costs
Weak Market Power Presumption
The costs of a judicial mistake
 A false positive (in a market power presumption):
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the court held that a non-monopoly is a monopoly
Costs:
the loss to the social welfare due to the action of the non-monopoly
entity that were prevented by the false positive
 In a non monopolistic market the chances of reducing the social
welfare by restricting a single entity are low
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 A false negative:
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the court falsely held that an entity is not a monopoly.
Costs:
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the loss to the social welfare due to the anti competitive action of the
monopoly entity
Costs of litigation are higher (proving the relevant market)
A negative mistake
Weak Market Power Presumption
Other Arguments Against the Market Power
Presumption
 The presumption will lead to more judicial
errors
 Pragmatically, the courts will be flooded with
antitrust claims against patent holders
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The presumption existed in the past
 The incentive to innovate will decrease, and
eventually will decrease social welfare
“An antitrust policy that reduced prices by 5 percent
today at the expense of reducing by 1 percent the
annual rate at which innovation lowers the costs of
production would be a calamity .In the long run a
continuous rate of change, compounded, swamps
static losses”
Weak Market Power Presumption
Part Five: A “Weak” Market
Power Presumption
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Evident Existence of Close Substitutes of the Patent
A Prima Facie Proof that the Price does not Deviate
Substantially from the Marginal Cost
The relevant Market Comprises of a Monopson, and the
Patent is not Crucial for the Monopson
The Case Involves a Patent without any Economic Value
The Case involves, allegedly, frivolous or invidious
Purposes
A weak market power presumption
 Defined situation in which the presumption is not
valid
 The defined situation can be proved by the
defended.
 When proven the burden of proof shift to the
plaintiff to prove the existence of market power
Weak Market Power Presumption
Situation 1: Evident Existence of Close Substitutes of the
Patent
 The market structure is known
 for instance, if the goods are a basic product
 the market was already declared in different court
decisions
 The relevant market through the eyes of the
“reasonable consumer” rather than through an
economic eyes
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A judicial approach to the relevant market definition
Can be applied only when the market defined over a
reasonable doubt
Weak Market Power Presumption
Situation 2: A Prima Facie Proof that the Price does not
Deviate Substantially from the Marginal Cost
 An initial proof that the marginal cost does not
deviate substantially from the price
 A defendant, mainly if it is a big firm, has more
ability and means to prima facie prove that its price
does not deviates substantially from its marginal
costs
Weak Market Power Presumption
Situation 3: The relevant Market Comprises of a Monopson,
and the Patent is not Crucial for the Monopson
 A Monopson, although being the consumer and not
on the seller, have some market power
 The monopson has a substantial market power
 When the patent is not considered as being an
essential input within the monopson – it is justified
to shift the burden of proof back to the plaintiff
Weak Market Power Presumption
Situation 4: The Case Involves a Patent without any
Economic Value
 95% of the patents have no economic value
 Even though it is unlikely – there is a possibilty that
a patent, in the litigation phase, have no economic
value
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Example: royalties paid for using the patent are low
Weak Market Power Presumption
Situation 5: The Case involves, allegedly, frivolous or
invidious Purposes
 In order to prevent the use of the presumption as a
tactical business means
 By proving the lawsuit is frivolous or invidious the
defendant can cancel the use of the presumption
 Used as deterence against false claims, pre litigation
stage
Weak Market Power Presumption
Summary
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Summary
details
Summary
 Tension between IP and Antitrust
 Mutual goal – maximizing the social wealth
 A weak form of the market power presumption
Weak Market Power Presumption
Details
 Guy Pessach…
 Itamar Morad…
Weak Market Power Presumption