Innovation incentives, compatibility, and expropriation as an antitrust remedy: The legacy of the Borland/Ashton-Tate consent decree

Antitrust Law Journal

Volumn 68, Issue 1, 2000, Pages 45-71

  Fazio, Catherine ^a   Stern, Scott ^a  

^a NONE

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EID: 0034417834     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (113)

1. RDBMS is a database management system that stores data in related tables, requires few assumptions about how data are related or how they will be extracted from the database, and allows a single database to be spread across several tables. See 〈webopedia.internet .com/Term/R/RDBMS.html〉.
2. Gary L. Reback & Christopher O.B. Wright, Government Antitrust Review of High-Technology Mergers, 9 COMPUTER LAW., June 1992, at 1, 8.
3. Competitive Impact Statement, United States v. Borland Int'l, Inc., 56 Fed. Reg. 56,096, 56,100 (1991) [hereinafter CIS] ("Ashton-Tate has . . . asserted copyright claims . . . which have impaired the ability of the xBASE firms to sell to certain customers. . . . Ashton-Tate has enjoyed competitive advantage as a result of its adoption as a "standard" by corporate customers."), final judgment, 1992-1 Trade Cas. (CCH) ¶ 69,774 (N.D. Cal. 1992) [hereinafter Final Judgment]. See also James Daly, dBASE Copyright Reinstated, 25(17) COMPUTERWORLD, Apr. 29, 1991, at 1.
4. At the time of the acquisition, Borland had announced its intention to unify the Paradox and dBASE standards by making them compatible. See Evan I. Schwartz & Richard Brandt, Ashton-Tate Is Not an Active Force Anymore, BUS. WK., July 22, 1991, at 23.
5. Final Judgment, supra note 3.
6. Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility, 75 AM. ECON. REV. 424 (1985); Joseph Farrell & Garth Saloner, Standardization, Compatibility and Innovation, 16 RAND J. ECON. 70 (1985); W. Brian Arthur, Competing Technologies, Increasing Returns, and Lock-In by Historical Events, 99 ECON. J. 116 (1989).
7. Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility, 75 AM. ECON. REV. 424 (1985); Joseph Farrell & Garth Saloner, Standardization, Compatibility and Innovation, 16 RAND J. ECON. 70 (1985); W. Brian Arthur, Competing Technologies, Increasing Returns, and Lock-In by Historical Events, 99 ECON. J. 116 (1989).
8. Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility, 75 AM. ECON. REV. 424 (1985); Joseph Farrell & Garth Saloner, Standardization, Compatibility and Innovation, 16 RAND J. ECON. 70 (1985); W. Brian Arthur, Competing Technologies, Increasing Returns, and Lock-In by Historical Events, 99 ECON. J. 116 (1989).
9. See Katz & Shapiro, supra note 6, at 425 ("if consumers expect a seller to be dominant, then consumers will be willing to pay more for the firm's product, and it will, in fact, be dominant."). Part II of this essay presents a much more thorough theoretical discussion of the economic consequences of the interaction between network externalities and IP protection.
10. William D. Nordhaus, An Economic Theory of Technological Change, 59 AM. ECON. REV. 18, 19 (1969); Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, 3 BROOKINGS PAPERS ON ECONOMIC ACTIVITY 783 (1987); U.S. Department of Justice & Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,152 [hereinafter Intellectual Property Guidelines].
11. William D. Nordhaus, An Economic Theory of Technological Change, 59 AM. ECON. REV. 18, 19 (1969); Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, 3 BROOKINGS PAPERS ON ECONOMIC ACTIVITY 783 (1987); U.S. Department of Justice & Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,152 [hereinafter Intellectual Property Guidelines].
12. William D. Nordhaus, An Economic Theory of Technological Change, 59 AM. ECON. REV. 18, 19 (1969); Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, 3 BROOKINGS PAPERS ON ECONOMIC ACTIVITY 783 (1987); U.S. Department of Justice & Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,152 [hereinafter Intellectual Property Guidelines].
13. William D. Nordhaus, An Economic Theory of Technological Change, 59 AM. ECON. REV. 18, 19 (1969); Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, 3 BROOKINGS PAPERS ON ECONOMIC ACTIVITY 783 (1987); U.S. Department of Justice & Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,152 [hereinafter Intellectual Property Guidelines].
14. WILLIAM D. NORDHAUS, INVENTION GROWTH AND WELFARE (1969).
15. Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP., Winter 1991, at 29, 30 ("Most economics literature on patenting and patent races has looked at innovations in isolation . . . but the cumulative nature of research poses problems . . . the challenge is to reward early innovators fully for the technological foundation they provide to later innovators, but to reward later innovators adequately for their improvements . . . as well.").
16. Carl Shapiro, Deputy Assistant Attorney General, U.S. Department of Justice, Antitrust Division, Antitrust in Network Industries, Remarks Before the American Law Institute and American Bar Association (Jan. 25,1996) ("Intellectual property rights . . . often determine whether a network can be kept proprietary or not.").
17. CARL SHAPIRO & HAL R. VARIAN, INFORMATION RULES 261 (1999) ("Time and again, incompatible technologies battle it out in the market in a high-stakes, winner-take-all battle.").
18. See CIS, supra note 3, at 56,100 (explaining that, because dBASE had been accepted as a standard, continued "assertion of copyright claims to the dBASE language thus would enable the merged entity unilaterally to raise the price of its RDBMS products.").
19. Id. (final judgment requires Borland to refrain from exercising certain copyright claims "to assure continuation of a competitive market place.").
20. Final Judgment, supra note 3.
21. See Kathy Rebello, This Has to Be Borland's Worst Nightmare, BUS. WK., Apr. 6, 1992, at 24.
22. Mark Brownstein, Microsoft Is Top DBMS, COMPUTER RESELLER NEWS, June 17, 1996, at 85.
23. The key theoretical contributions in this field are Katz & Shapiro, supra note 6; Farrell & Saloner, supra note 6; and Arthur, supra note 6.
24. While the concept of network externalities was developed in the context of physically linked networks like telephones and electricity supply, see Jeffrey Rohlfs, A Theory of Interdependent Demand for a Communication Service, 5 BELL J. ECON. 16 (1974) ("The utility that a subscriber derives from a communication service increases as others join the system"), the underlying ideas were soon applied to "virtual" networks, such as in the use of common interfaces for typewriter keyboards or computer software, where network effects arise because the number of complements available for a specific product or service tends to rise with the number of users. See Paul A. David, Clio and the Economics of QWERTY, 75 AM. ECON. REV. 332 (1985); Katz & Shapiro, supra note 6; Farrell & Saloner, supra note 6; Arthur, supra note 6. The dBASE and Paradox standards in RDBMS are examples of such virtual networks. See CIS, supra note 3, at 56100 ("Widespread use of RDBMS software product results in a large pool of trained users, applications developers and compatible tools that in turn promotes the further use of that product.").
25. While the concept of network externalities was developed in the context of physically linked networks like telephones and electricity supply, see Jeffrey Rohlfs, A Theory of Interdependent Demand for a Communication Service, 5 BELL J. ECON. 16 (1974) ("The utility that a subscriber derives from a communication service increases as others join the system"), the underlying ideas were soon applied to "virtual" networks, such as in the use of common interfaces for typewriter keyboards or computer software, where network effects arise because the number of complements available for a specific product or service tends to rise with the number of users. See Paul A. David, Clio and the Economics of QWERTY, 75 AM. ECON. REV. 332 (1985); Katz & Shapiro, supra note 6; Farrell & Saloner, supra note 6; Arthur, supra note 6. The dBASE and Paradox standards in RDBMS are examples of such virtual networks. See CIS, supra note 3, at 56100 ("Widespread use of RDBMS software product results in a large pool of trained users, applications developers and compatible tools that in turn promotes the further use of that product.").
26. What has come to be known as "QWERTY-nomics" provides a good example. David suggests that while, in theory, there are a tremendous variety of possible typewriter keyboard layouts (of which the common QWERTY is but one), the existence of network externalities creates a benefit to consumers from the standardization of typewriter layout choices. See David, supra note 19, at 335. Although David's interpretation of QWERTY as an example of an "inefficient" technology is controversial, see S.J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. ECON. PERSP., Spring 1994, at 133, emerging empirical work in this area confirms David's basic insight that network externalities play an important role in shaping economic outcomes. See Shane M. Greenstein, Did Installed Base Give an Incumbent Any (Measurable) Advantages in Federal Computer Procurement?, 24 RAND J. ECON. 19 (1993); Neil Gandal, Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities, 25 RAND J. ECON. 160 (1994).
27. What has come to be known as "QWERTY-nomics" provides a good example. David suggests that while, in theory, there are a tremendous variety of possible typewriter keyboard layouts (of which the common QWERTY is but one), the existence of network externalities creates a benefit to consumers from the standardization of typewriter layout choices. See David, supra note 19, at 335. Although David's interpretation of QWERTY as an example of an "inefficient" technology is controversial, see S.J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. ECON. PERSP., Spring 1994, at 133, emerging empirical work in this area confirms David's basic insight that network externalities play an important role in shaping economic outcomes. See Shane M. Greenstein, Did Installed Base Give an Incumbent Any (Measurable) Advantages in Federal Computer Procurement?, 24 RAND J. ECON. 19 (1993); Neil Gandal, Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities, 25 RAND J. ECON. 160 (1994).
28. What has come to be known as "QWERTY-nomics" provides a good example. David suggests that while, in theory, there are a tremendous variety of possible typewriter keyboard layouts (of which the common QWERTY is but one), the existence of network externalities creates a benefit to consumers from the standardization of typewriter layout choices. See David, supra note 19, at 335. Although David's interpretation of QWERTY as an example of an "inefficient" technology is controversial, see S.J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. ECON. PERSP., Spring 1994, at 133, emerging empirical work in this area confirms David's basic insight that network externalities play an important role in shaping economic outcomes. See Shane M. Greenstein, Did Installed Base Give an Incumbent Any (Measurable) Advantages in Federal Computer Procurement?, 24 RAND J. ECON. 19 (1993); Neil Gandal, Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities, 25 RAND J. ECON. 160 (1994).
29. Lawrence M. Fisher, Borland to Acquire a Rival; Stock Swap Deal for Ashton-Tate Put at $439 Million, N.Y. TIMES, July 11, 1991, at D5.
30. This example draws on Joseph Farrell & Garth Saloner, Installed Base and Compatibility: Innovation, Product Preannoucements and Predation, 76 AM. ECON. REV. 940 (1986).
31. For an introduction to the vast literature on the theoretical economic research concerning lock-in, see 8 J. ECON. PERSP., Spring 1994 (symposium issue on lock-in); SHAPIRO & VARIAN, supra note 12; William E. Cohen, Competition and Foreclosure in the Context of Installed Base and Compatibility Effects, 64 ANTITRUST L.J. 535 (1996); and the web site maintained by Nicholas Economides, 〈www.stern.nyu.edu/networks/site.html〉.
32. For an introduction to the vast literature on the theoretical economic research concerning lock-in, see 8 J. ECON. PERSP., Spring 1994 (symposium issue on lock-in); SHAPIRO & VARIAN, supra note 12; William E. Cohen, Competition and Foreclosure in the Context of Installed Base and Compatibility Effects, 64 ANTITRUST L.J. 535 (1996); and the web site maintained by Nicholas Economides, 〈www.stern.nyu.edu/networks/site.html〉.
33. For an introduction to the vast literature on the theoretical economic research concerning lock-in, see 8 J. ECON. PERSP., Spring 1994 (symposium issue on lock-in); SHAPIRO & VARIAN, supra note 12; William E. Cohen, Competition and Foreclosure in the Context of Installed Base and Compatibility Effects, 64 ANTITRUST L.J. 535 (1996); and the web site maintained by Nicholas Economides, 〈www.stern.nyu.edu/networks/site.html〉.
34. See SHAPIRO & VARIAN, supra note 12, at 142-70.
35. It appears that this may have happened in the RDBMS software market after consummation of the Borland merger. Prior to the merger, Borland and Ashton-Tate made two incompatible RDBMS software products (Paradox and dBASE). Although Borland's stated intention was to combine the two technologies to create a new standard, consumers were uncertain about Borland's ability to integrate Paradox and dBASE successfully. See Schwartz & Brandt, supra note 4. In addition, consumers were unsure which RDBMS standard would function best on Microsoft's emerging Windows operating system. As a result, no single technology standard emerged immediately after the Borland/Ashton-Tate merger and the RDBMS software market fragmented across a number of different, incompatible RDBMS products. See Scott Mace, xBASE After Ashton-Tate, 43 INFOWORLD, Oct. 28, 1991, at 55.
36. See SHAPIRO & VARIAN, supra note 12.
37. For more on the incentives for consumers to play a waiting game (the so-called penguin effect) and the likelihood of lock-in (i.e., "herding"), see J.P. Choi, Herd Behavior, the Penguin Effects and the Suppression of Informational Diffusion: An Analysis of Informational Externalties and Payoff Interdependency, 28 RAND J. ECON. 407, 418-22 (1997).
38. Id.
39. See SHAPIRO & VARIAN, supra note 12.
40. Joseph Kattan, Market Power in the Presence of an Installed Base, 62 ANTITRUST L.J. 1 (1993).
41. For example, there may be important design trade-offs in ensuring backward or reverse comparability with prior product generations, which may affect growth in the intrinsic performance or functionality of the technology. If the cost of reverse compatibility is sufficiently high, it is possible that the market may become locked-in to an inferior technology. See David, supra note 19; Arthur, supra note 6. On a more positive note, a window for radical innovation may be opened. Indeed, Borland took advantage of such a window in entering the RDBMS market. During the late 1980s, Ashton-Tate began to lose its dominant market position when efforts to ensure backward compatibility delayed new product releases and resulted in inferior product performance. In 1987, Borland acquired the company which had developed Paradox and began marketing Paradox as a low-priced substitute for dBASE. See Reback, supra note 2, at 9.
42. See Anita M. McGahan et al., Creating Value & Setting Standards: The Lessons of Consumer Electronics for Personal Digital Assistants, in COMPUTING IN THE AGE or DIGITAL CONVERGENCE 227 (David Yoffie ed., 1997).
43. Michael L. Katz & Carl Shapiro, Product Introductions with Network Externalities, 40 J. INDUS. ECON. 55, 74 (1992) ("we have found that a pioneering firm with strong property rights might deny an entrant the right to produce compatible products as a way of blocking the introduction of improved but competitive products").
44. Id.
45. See Joseph Farrell & Garth Saloner, Coordination Through Committees and Markets, 19 RAND J. ECON. 235 (1988); Joseph Farrell & Nancy Gallini, Second-Sourcingas a Commitment: Monopoly Incentives to Attract Competition, 103 Q.J. ECON. 673 (1988). For a fascinating discussion of "open standards" strategies in practice, see McGahan et. al., supra note 32.
46. See Joseph Farrell & Garth Saloner, Coordination Through Committees and Markets, 19 RAND J. ECON. 235 (1988); Joseph Farrell & Nancy Gallini, Second-Sourcingas a Commitment: Monopoly Incentives to Attract Competition, 103 Q.J. ECON. 673 (1988). For a fascinating discussion of "open standards" strategies in practice, see McGahan et. al., supra note 32.
47. Standard-setters sometimes appropriate the returns from R&D in these cases by establishing a "branded" position in a more price-insensitive market segment, as occurred during IBM's first decade of "branded" leadership in the PC industry. See Timothy F. Bresnahan et al., Market Segmentation and the Sources of Rents from Innovation: Personal Computers in the Late 1980s, 28 RAND J. ECON. 17 (1997).
48. See Michael A. Cusumano et al., Strategic Maneuvering and Mass-Market Dynamics: The Triumph of VHS over Beta, 66 BUS. HIST. REV. 51 (Spring 1992); EMERSON W. PUGH, BUILDING IBM: SHAPING AN INDUSTRY AND ITS TECHNOLOGY (1995).
49. See Michael A. Cusumano et al., Strategic Maneuvering and Mass-Market Dynamics: The Triumph of VHS over Beta, 66 BUS. HIST. REV. 51 (Spring 1992); EMERSON W. PUGH, BUILDING IBM: SHAPING AN INDUSTRY AND ITS TECHNOLOGY (1995).
50. See SHAPIRO & VARIAN, supra note 12, at 164 ("In most cases, you'll be tempted to charge the highest price to your own installed base). See also Michael L. Katz & Carl Shapiro, Antitrust in Software Markets, in COMPETITION, INNOVATION AND THE MICROSOFT MONOPOLY: ANTITRUST IN THE DIGITAL MARKETPLACE (J.A. Eisenach & Thomas Lenard eds., 1999).
51. Id.
52. See Douglas Barney, Esber Stands Firm Behind Dbase Lawsuit, COMPUTERWORLD, Jan. 23, 1991, at 45; see also Ashton-Tate Lawsuit Is Labeled Meritless by Fox Software, Inc., WALL ST. J., Nov. 22, 1988, at B8.
53. See Douglas Barney, Esber Stands Firm Behind Dbase Lawsuit, COMPUTERWORLD, Jan. 23, 1991, at 45; see also Ashton-Tate Lawsuit Is Labeled Meritless by Fox Software, Inc., WALL ST. J., Nov. 22, 1988, at B8.
54. See Daly, supra note 3.
55. Ashton-Tate's litigation against Fox was settled pursuant to the Borland consent decree. See CIS, supra note 3, at 56,098; see also Final Judgment, supra note 3.
56. The relationship between incentives for invention and property rights has long been recognized. For an early discussion, see FRITZ MACHLUP, AN ECONOMIC REVIEW OF THE PATENT SYSTEM, STUDY #15 OF THE SUBCOMMITTEE ON PATENTS, TRADEMARKS, AND COPYRIGHTS OF THE COMMITTEE ON THEJUDICIARY (1958). For a discussion of the historical antecedents to modern IP institutions, see Paul A. David, Intellectual Property Institutions and the Panda's Thumb: Patents, Copyrights, and Trade Secrecy in Economic Theory and History, in GLOBAL DIMENSION OF INTELLECTUAL PROPERTY IN SCIENCE AND TECHNOLOGY 19 (Mitchell Wallerstein et al. eds., 1993).
57. The relationship between incentives for invention and property rights has long been recognized. For an early discussion, see FRITZ MACHLUP, AN ECONOMIC REVIEW OF THE PATENT SYSTEM, STUDY #15 OF THE SUBCOMMITTEE ON PATENTS, TRADEMARKS, AND COPYRIGHTS OF THE COMMITTEE ON THEJUDICIARY (1958). For a discussion of the historical antecedents to modern IP institutions, see Paul A. David, Intellectual Property Institutions and the Panda's Thumb: Patents, Copyrights, and Trade Secrecy in Economic Theory and History, in GLOBAL DIMENSION OF INTELLECTUAL PROPERTY IN SCIENCE AND TECHNOLOGY 19 (Mitchell Wallerstein et al. eds., 1993).
58. Modern theoretical economic analysis of the consequences of imperfect IP rights was first articulated in Richard Nelson, The Simple Economics of Basic Scientific Research, 67 J. POL. ECON. 297 (1959); Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY 609 (Richard Nelson ed., 1962); NORDHAUS, supra note 9.
59. Modern theoretical economic analysis of the consequences of imperfect IP rights was first articulated in Richard Nelson, The Simple Economics of Basic Scientific Research, 67 J. POL. ECON. 297 (1959); Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY 609 (Richard Nelson ed., 1962); NORDHAUS, supra note 9.
60. In the last two decades, there has been a great deal of systematic research documenting the existence and economic consequences of spillovers. See Adam Jaffe, Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value, 76 AM. ECON. REV. 984 (1986); Adam Jaffe et al., Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations, 108 Q.J. ECON. 577 (1993); R&D, PATENTS AND PRODUCTIVITY: THE ECONOMETRIC EVIDENCE (Zvi Griliches ed., 1997).
61. In the last two decades, there has been a great deal of systematic research documenting the existence and economic consequences of spillovers. See Adam Jaffe, Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value, 76 AM. ECON. REV. 984 (1986); Adam Jaffe et al., Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations, 108 Q.J. ECON. 577 (1993); R&D, PATENTS AND PRODUCTIVITY: THE ECONOMETRIC EVIDENCE (Zvi Griliches ed., 1997).
62. In the last two decades, there has been a great deal of systematic research documenting the existence and economic consequences of spillovers. See Adam Jaffe, Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value, 76 AM. ECON. REV. 984 (1986); Adam Jaffe et al., Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations, 108 Q.J. ECON. 577 (1993); R&D, PATENTS AND PRODUCTIVITY: THE ECONOMETRIC EVIDENCE (Zvi Griliches ed., 1997).
63. See Levin et al., supra note 8 ("The survey . . . confirmed that other means of appropriation are typically more important than the patent system . . . [and] also confirmed substantial interindustry variation in the level of appropriability and in the mechanisms that provide it.").
64. For a discussion of the effectiveness of alternative institutions to the provision of intellectual property, see Brian D. Wright, The Economics of Invention Incentives: Patents, Prizes, and Research Contracts, 73 AM. ECON. REV. 691 (1983); David, supra note 43.
65. See David, supra note 43; ROBERT P. MERGES, PATENT LAW AND POLICY (1992).
66. Joseph Farrell & Michael L. Katz, The Effects of Antitrust and Intellectual Property Law on Compatibility and Innovation, 43 ANTITRUST BULL. 609, 613 (1998) ("If the specifications and technology that embody a standard are the protected IPRs of one party, then it can unilaterally block other suppliers from producing compatible products."). See also Scotchmer, supra note 10.
67. See Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995).
68. See Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995).
69. See Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995).
70. By an "open" standard, we are referring to an environment where a standard-setter permits the use of its technology by at least some other firms, perhaps for a licensing fee paid by the entrant to the standard-setter. If increases in the overall installed base for the standard and the licensing revenue derived from entrants outweigh the costs to the standard-setter from increased competition within the standard, then standard-setters may have an incentive to pursue at least limited licensing. See Stanley M. Besen & Joseph Farrell, Choosing How to Compete: Strategies and Tactics in Standardization, 8 J. ECON. PERSP., Spring 1994, at 117; Nancy T. Gallini & Ralph A. Winter, Licensing in the Theory of Innovation, 16 RAND J. ECON. 237-52 (1985); McGahan et al., supra note 32.
71. By an "open" standard, we are referring to an environment where a standard-setter permits the use of its technology by at least some other firms, perhaps for a licensing fee paid by the entrant to the standard-setter. If increases in the overall installed base for the standard and the licensing revenue derived from entrants outweigh the costs to the standard-setter from increased competition within the standard, then standard-setters may have an incentive to pursue at least limited licensing. See Stanley M. Besen & Joseph Farrell, Choosing How to Compete: Strategies and Tactics in Standardization, 8 J. ECON. PERSP., Spring 1994, at 117; Nancy T. Gallini & Ralph A. Winter, Licensing in the Theory of Innovation, 16 RAND J. ECON. 237-52 (1985); McGahan et al., supra note 32.
72. The centrality of the "disclosure" effect was first discussed in Arrow, supra note 44, at 615 ("there is a fundamental paradox in the . . . demand for information; its value for the purchaser is not known until he has the information, but then he has in effect acquired it without cost."). More recent theoretical considerations have considered the strategic implications of the disclosure problem. See James J. Anton & Dennis A. Yao, Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights, 84 AM. ECON. REV. 190 (1994);
73. Joshua Gans & Scott Stern, Incumbency and R&D Incentives: Licensing the Gale of Creative Destruction, J. ECON. & MGMT. STRATEGY (forthcoming 2000). This disclosure problem is particularly salient in determining the nature of interaction between early-generation and later-generation innovators. See Scotchmer, supra note 10, at 37 ("it is misleading to ask how broad patent protection should be without simultaneously asking whether research firms can integrate or otherwise cooperate.").
74. Indeed, the DOJ and FTC recognize that licensing can be structured restrictively for anticompetitive purposes. Such efforts are not immune from antitrust enforcement. See Intellectual Property Guidelines, supra note 8, § 3.1 ("licensing arrangement could include restraints that adversely affect competition . . .").
75. See Jennifer F. Reinganum, On the Timing of Innovation, in 1 HANDBOOK OF INDUSTRIAL ORGANIZATION 849, 850 (Richard Schmalansee & Robert D. Willig eds., 1989) ("The typical outcome . . . is that aggregate expenditure on R&D is too high relative to the cooperative optimum; there are too many firms and each invests too much . . . the firms (collectively) forgo intertemporal efficiencies which could be realized by investing at a lower rate over a longer planning horizon.").
76. See the discussion of spillovers and appropriability as documented by Levin et al., supra note 8.
77. A brief but compelling account is provided in Quentin Hardy, Cordless Confusion, WALL ST. J., Sept. 11, 1997, Interactive Edition, 〈http://update2.wsj.com/public/current/ articles/SB873669114229335000.htm〉.
78. See Qualcomm Takes Wall Street Honours, FIN. TIMES, Dec. 30, 1999, at 1.
79. For an estimate, see Jerry Hausman, Cellular Telephone, New Products and the CPI (NBER Working Paper #5982 March 1997).
80. Hardy, supra note 56 ("manufacturers have spent extra billions of dollars developing technologies that aren't much different, an effort that has put the U.S. several years behind Europe in rolling out digital phones and services. Now the American consumer will be contending for years with three or more digital-phone standards that are incompatible").
81. See, e.g., Intellectual Property Guidelines, supra note 8, § 2.1 ("If a patent or other form of intellectual property does confer market power, that market power does not by itself offend the antitrust laws.").
82. F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 456 (1980).
83. See Joseph Kattan, Trends in Intellectual Property Antitrust Enforcement, ANTITRUST, Summer 1997, at 26, 31 ("There are additional areas of enforcement focus in which the rules of the road may not be as clear cut. . . . The most important of these are the treatment of pooling arrangements and cross-license agreements and the competition for industry standards that require access to intellectual property."); see also David Balto & Robert Pitofsky, Antitrust and High-Tech Industries: The New Challenge, 43 ANTITRUST BULL. 583, 603 (1998) ("enforcement officials, scholars, and practitioners have all embraced the notion that the competitive story in high-technology industries is somewhat different than what we have been used to . . . . Consensus stops at this point. What these differences are, and what the policy implications of such differences should be, are subjects of widely diverse ideas.").
84. See Joseph Kattan, Trends in Intellectual Property Antitrust Enforcement, ANTITRUST, Summer 1997, at 26, 31 ("There are additional areas of enforcement focus in which the rules of the road may not be as clear cut. . . . The most important of these are the treatment of pooling arrangements and cross-license agreements and the competition for industry standards that require access to intellectual property."); see also David Balto & Robert Pitofsky, Antitrust and High-Tech Industries: The New Challenge, 43 ANTITRUST BULL. 583, 603 (1998) ("enforcement officials, scholars, and practitioners have all embraced the notion that the competitive story in high-technology industries is somewhat different than what we have been used to . . . . Consensus stops at this point. What these differences are, and what the policy implications of such differences should be, are subjects of widely diverse ideas.").
85. Katz & Shapiro, supra note 38, at 40 ("We are much more receptive to mandatory open interfaces as a remedy for other antitrust violations.").
86. See supra Part H.A.
87. See Peter G. Spivack, Does Form Follow Function? The Idea/Expression Dichotomy in Copyright Protection of Computer Software, 35 UCLA L. REV. 723 (1988). We recognize that there are, of course, inherent difficulties in assessing characteristics such as utility or obviousness in any IP regime. Our principal point, however, is that the historical rules used to assign and enforce copyrights are weighted towards evaluating precise expression, often leading to a certain arbitrariness in the allocation of IP rights.
88. Indeed, the arbitrary nature of software standards was a key element of the argument used by Borland to invalidate Lotus Corporation's copyright claim over the "look- and-feel" of its menus and software command structures for its spreadsheet software. See A. Douglas Melamed, Principal Deputy Assistant Attorney General, U.S. Department of Justice Antitrust Division, Network Industries and Antitrust, Remarks Before the Federalist Society (Apr. 10, 1999); see also Howard W. Fogt & Ilene Knable Gotts, The Antitrust and Technology Transfer Licensing Interface: A Comparative Analysis of Current Developments, 13 INT'L TAX & BUS. L.J. (1995) (review of recent developments in terms of IP expropriation based on novelty concerns.)
89. Scotchmer, supra note 10.
90. See Rebecca Henderson, Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry, 24 RAND J. ECON. 248, 254 (1993); CLAYTON M. CHRISTENSEN, THE INNOVATOR'S DILEMMA (1997).
91. See Rebecca Henderson, Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry, 24 RAND J. ECON. 248, 254 (1993); CLAYTON M. CHRISTENSEN, THE INNOVATOR'S DILEMMA (1997).
92. See Henderson, supra note 68.
93. See Scotchmer, supra note 10.
94. Green & Scotchmer, supra note 50.
95. See infra Part IV.
96. See supra Part II.B.
97. In some sense, then, compulsory licensing is analogous to providing access to an "essential facility." While fair prices for access must be paid, at least some potential entrants must be allowed to compete on the same "playing field" as the standard-setter. See Mark A. Lemley, Antitrust and the Internet Standardization Problem, 28 CONN. L. REV. 1045, 1084 (1996) ("Alternatively, antitrust might treat access to a standard-setting organization . . . as an essential facility.").
98. Farrell & Gallini, supra note 35, emphasize the incentives of the standard-setter to do so.
99. For a brief explanation of the trade-offs inherent in ensuring reverse or backward compatibility, see supra note 31.
100. See supra Part III.A.
101. See CIS, supra note 3, at 56,100.
102. The merger would increase the HHI over 1400 points and so clearly fell within the range of competitive concern. See U.S. Department of Justice & Federal Trade Commission Horizontal Merger Guidelines (1992, as amended 1997) § 1.51, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104. Not surprisingly, the merging firms countered that 1991 market shares and concentration indices were mostly irrelevant, given the imminent shift from MS-DOS to Windows. See CIS, supra note 3, at 56,100.
103. The merger would increase the HHI over 1400 points and so clearly fell within the range of competitive concern. See U.S. Department of Justice & Federal Trade Commission Horizontal Merger Guidelines (1992, as amended 1997) § 1.51, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104. Not surprisingly, the merging firms countered that 1991 market shares and concentration indices were mostly irrelevant, given the imminent shift from MS-DOS to Windows. See CIS, supra note 3, at 56,100.
104. See CIS, supra note 3, at 56,100.
105. Id.
106. See supra Part III.
107. See supra Part II.A.
108. See Fisher, supra note 21, at D5.
109. For example, Fox software was regarded as providing significantly faster indexing functions and greater ease of use. See Kathleen K. Wiegner, Nasty Surprise, FORBES, May 13, 1991, at 112.
110. Rebello, supra note 16.
111. Brownstein, supra note 17.
112. Lemley, supra note 74.
113. Intergraph Corp. v. Intel Corp., 195 F.3d 1346 (Fed. Cir. 1999) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) ("The antitrust laws were enacted for 'the protection of competition, not competitors.'") (citations omitted)).