An Economists

Perspective on
Holdup
Patents in Telecoms Conference
November 5-6, 2015
Nancy L. Rose
Antitrust Division, U.S. Department of Justice

Transaction Cost Economics

Ronald Coase
Williamson

University of Chicago Law School

John Nash

Economicforum 2011, Wikipedia/Wikimedia

Commons (cc-by-sa-3.0)

Oliver

Prolineserver 2010, Wikipedia/Wikimedia

Commons (cc-by-sa-3.0)

Opportunity for
Opportunism
The setting:
Investments that are
Relation-specific
And made before
all deal terms are
negotiated

The Cost of Opportunism

Potential problems:
Underinvestment
Costs incurred to avoid
holdup
Costs of actual holdup

Limiting Opportunism
Potential Solution # 1
Vertical Integration

Limiting Opportunism
Potential Solution
#2
Long term
contracts

Limiting Opportunism
Potential Solution
#3
Less specific
investment

Miheco 2012, Wikipedia/Wikimedia Commons (cc-by-sa-2.0)

Lessons from 40 Years of

Research on Transaction Cost
Economics
Vast economics literature explores how
firms deal with opportunism/holdup
Empirical work consistently
demonstrates the link between
conditions for holdup and the
institutions predicted to mitigate it
Focusing on disputes misses the point
these should be relatively rare

Case study: Fisher Auto

Body/GM

Holdup Resembles Dark

Matter
See it?

Courtesy: NASA/ESA

Whats SEP Got to Do with

This?
Ideal conditions for opportunism
Relationship specific investment
Uncertainty in many dimensions
Incomplete contracting
Amplified by institutional
transformations in markets like
telecomm technology

Empirical Evidence that SSO

Participants Agree on the
Threat
SSO policies to mitigate patent holdup threat:
Disclosure requirements
Licensing obligations (most often F/RAND)

Are these enough?

Have Institutions Eliminated

Holdup?
Anecdotal evidence from court
decisions: patentees often demand
royalties well in excess of RAND

The Greatest Empirical

Challenge
What Would the World Look
Like
With No Holdup?
Specifying a credible
counterfactual

Huge Benefits of Mobile

Innovation

JULIO BEZERRA ET AL., THE MOBILE REVOLUTION: HOW MOBILE TECHNOLOGIES DRIVE A
TRILLION DOLLAR IMPACT 3, 9 (The Boston Consulting Group Jan. 15, 2015)

But does this tell us anything about patent holdup?

Importance of a Credible
Counterfactual

SEP intensive
products
without holdup?
Galetovic, Alexander, Stephen Haber, and Ross Levine . 2015. An Empirical
Examination of Patent Holdup.
Journal of Competition Law & Economics, 11(3), pp. 549-578.

Closing Thoughts
We should encourage developments to
clarify SEP commitments and reduce
opportunism
Greater specificity about what F/RAND means
More clarity on rights of licensor and licensee
This has ex ante benefits for both sides
DOJ has looked favorably on SSOs clarifying RAND
VITA (2006), IEEE (2007), ex ante disclosure of
licensing terms
IEEE (2015)