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Abstract:
In the wake of a series of court cases extending patents to software, open-source software proponents have proposed a number of arguments for limiting or even eliminating software patents. In particular, they claim that the U.S. Patent and Trademark Office has done a poor job of reviewing software patent applications, resulting in obvious, trivial patents. They also maintain that software patents hinder the standards setting process so important for high-technology industries and that patents will to lead to intellectual property rights "thickets" that slow down or stop the innovative process in the software industry. We evaluate these claims, examining relevant empirical evidence where available. While it is clear that problems exist with the patent-granting process, they do not rise to the level of justifying a ban on software patents. Instead, other reasonable - and far less drastic - measures are available. The USPTO has already begun reforms that should improve its software patent review process. As for patent thickets, theory suggests they could form in the software industry, but empirical evidence suggests that in fact they have not formed. Moreover, tools such as patent pools and cross-licensing that increase innovation sharing are available to limit the development of thickets. While the academic literature is still debating the link between patents and innovation, patents have been show to have some positive effects, including increased venture capital funding for small firms. In the end, reform is far more attractive than abolition because it retains the good while minimizing the bad.

Software patents, open source, intellectual property

Abstract:
We explore potential methods for assessing whether licensing terms for intellectual property declared essential within a standard setting organization can be considered fair, reasonable, and non-discriminatory (FRAND). We first consider extending Georgia-Pacific to a standard setting context. We then evaluate numeric proportionality, which is modelled after certain patent pool arrangements and which has been proposed in a pending FRAND antitrust suit. We then turn to two economic models with potential. The first - the efficient component-pricing rule (ECPR) - is based on the economic concept of market competition. The second - the Shapley value method - is based on cooperative game theory models and social concepts for a fair division of rents. Interestingly, these two distinct methods suggest a similar benchmark for evaluating FRAND licenses, but ones which might appeal differently to the courts and competition authorities in the US as compared to Europe. We find that under any approach, patents covering essential technologies with a greater contribution to the value of the standard and without close substitutes before the standard gets adopted should receive higher royalty payments after the adoption of the standard.

Efficiency, Fairness, Licensing, Patents, Standard Setting Organizations

Abstract:
We explore two distinct methods for assessing whether licensing terms for intellectual property declared essential within a standard setting organization can be considered fair, reasonable, and non-discriminatory (FRAND). The first method - the efficient component-pricing rule (ECPR) - is based on the economic concept of market competition. The second - the Shapley value method - is based on cooperative game theory models and social concepts for a fair division of rents. Interestingly, these two distinct methods suggest a similar benchmark for evaluating FRAND licenses. We find that under both approaches, patents covering "essential" technologies with a greater contribution to the value of the standard and without close substitutes before the standard gets adopted should receive higher royalty payments after the adoption of the standard.

FRAND, standardization, SSOs, ECPR, Shapley Value, patent valuation

Abstract:
Many people are concerned that information about their private life is more readily available and more easily captured on the Internet as compared to offline technologies. Specific concerns include unwanted email, credit card fraud, identity theft, and harassment.

This paper analyzes key issues surrounding the protection of online privacy. It makes three important contributions: First, it provides the most comprehensive assessment to date of the estimated benefits and costs of regulating online privacy. Second, it provides the most comprehensive evaluation of legislation and legislative proposals in the U.S. aimed at protecting online privacy. Finally, it offers some policy prescriptions for the regulation of online privacy and suggests areas for future research.

After analyzing the current debate on online privacy and assessing the potential costs and benefits of proposed regulations, our specific recommendations concerning the government's involvement in protecting online privacy include the following:

* The government should fund research that evaluates the effectiveness of existing privacy legislation before considering new regulations.

* The government should not generally regulate matters of privacy differently based on whether an issue arises online or offline.

* The government should not require a Web site to provide notification of its privacy policy because the vast majority of commercial U.S.-based Web sites already do so.

* The government should distinguish between how it regulates the use and dissemination of highly sensitive information, such as certain health records or Social Security numbers, versus more general information, such as consumer name and purchasing habits.

* The government should not require companies to provide consumers broad access to the personal information that is collected online for marketing purposes because the benefits do not appear to be significant and the costs could be quite high.

* The government should make it easier for the public to obtain information on online privacy and the tools available for consumers to protect their own privacy.

The message of this paper is not that online privacy should be unregulated, but rather that policy makers should think through their options carefully, weighing the likely costs and benefits of each proposal.

Abstract:
The theoretical analyses of patent pools almost exclusively assume that participation is automatic - any firm with a relevant patent and an option to join a patent pool is assumed to do so. But allowing firms to opt out of patent pools is a far more realistic assumption since all modern patent pools are voluntary. In this paper, we present empirical evidence on participation rates and the factors that drive the decision to join a pool. We also summarize the various profit sharing rules found in modern patent pools, and explore the consequences of the rule chosen. We find that vertically integrated firms are more likely to join a patent pool and among those firms that do join, those with relatively symmetric patent contributions to a standard appear more likely to accept numeric patent share rules for dividing royalty earnings.

Patent Pools, Standards Setting Organizations, Intellectual Property, Royalty Sharing

Abstract:
Ever since the first general-purpose charge card debuted in the early 1950s, pundits have been predicting the cashless society. Over fifty years later, we may finally be getting close to that vision. This study is the first to examine empirically the move toward a cashless society using a cost-benefit framework. We find that when all key parties to a transaction are considered and benefits are added, cash and checks are more costly than many earlier studies suggest. In general, the shift toward a cashless society appears to be a beneficial one.

cashless society, cost-benefit

Abstract:
Firm structure and the degree of vertical integration lie at the core of a key intellectual property concern currently under debate: "patent trolls." While court opinions and competition agency decisions have focused on "non-practicing" patent holders as the source of anticompetitive exclusion and hold up problems, this view of upstream specialists is far too narrow. In fact, patents in the hands of non-practicing entities can increase competition, lower downstream prices, and enhance consumer choice. We explain why and argue for more business-model-neutral policy when it comes to patent licensing. Clearly, patents are a complex subject that cannot be portrayed as either all good or all bad; tradeoffs will always be involved. Without a better understanding of the many complicated effects of patents in high technology markets, we run the very real risk of misguided policy decisions.

Abstract:
The Supreme Court's 2006 eBay ruling marked a turning point in injunctive relief policy. Unfortunately, there seems to be considerable confusion about the implications of the decision. Some authors, concerned over patent holdup and excessive royalty rates, interpret the eBay decision as giving a green light to district courts to deny injunctive relief to non-manufacturing patent owners. Using an error cost framework, we examine the theory and evidence behind patent holdup concerns as they relate to injunctive relief policy. We find that the holdup theory justifying categorical limitations on injunctive relief rests upon overly narrow assumptions. As a result, categorical limitations are likely to result in substantial false positives, where patent holders with no designs of patent holdup are nonetheless denied injunctive relief. Instead of advocating categories of denial, we argue that the majority opinion in eBay can and should be read as a return to a balancing test, where costs and benefits are weighed carefully before granting or denying a patent injunction.

injunctive relief, patent holdup, patent injunction, IP policy, standard setting, patent compensation, eBay, royalty rates

Abstract:
Royalty stacking, the most recent incarnation of the complements problem identified in the early 1800s by French engineer Augustine Cournot, has received considerable attention. The potential for royalty stacking within standard setting efforts arises from the fact that downstream manufacturing companies can face multiple upstream gatekeepers, each of whom must grant a license to their "essential" patents before the downstream firms can legally commercialize the standard. Some authors have claimed that in high-tech industries - which are frequently characterized by cumulative innovation, dispersed ownership of patents, and cooperative standard setting efforts - the cost of obtaining all necessary licenses is too high, such that innovation has been thwarted and consumers have been harmed. In this paper, we assess the case for royalty stacking within standards and find the evidentiary support weak at best. We note that the relevant question is not whether royalty stacking is possible, as the theoretical arguments behind it have withstood the test of time, but whether it is common enough and costly enough in actuality to warrant policy changes. The available evidence suggests not, implying that any policy changes aimed at solving royalty stacking are likely to cause more (unintended) harm than they cure.

Royalty Stacking, Patent Thicket, Patent Holdup, Anticommons, Innovation, Patent Licensing

Abstract:
E-commerce has experienced tremendous growth over the past few years. Nonetheless, senators, privacy watchdog groups, and the Federal Trade Commission have argued that e-commerce is being held back by consumer worries about online privacy and security. Some privacy advocates are calling for additional regulations specifically new online privacy rules aimed at providing consumers with more information and customer choice. And Congress has tried to answer that call most recently with a bill introduced by Senator Ernest Hollings. This essay examines the case for more government regulation and argues that the advocates have overstated their case. While some consumers, particularly older Americans and those new to the Internet, are clearly concerned about online privacy and security, these issues do not appear any more urgent for online shopping than offline shopping. Nor do these issues emerge as significant deterrents to e-commerce. Indeed, it is not even clear that any e-commerce has been deterred. Absent evidence of a significant market failure, the case for further government intervention is weak at best.

E-commerce, Government Regulation

Abstract:
RAND commitments — i.e., promises to license on reasonable and non-discriminatory terms — play a key role in standard setting processes. However, the usefulness of those commitments has recently been questioned. The problem allegedly lies in the absence of a generally agreed test to determine whether a particular license satisfies a RAND commitment. Swanson and Baumol have suggested that the concept of a 'reasonable' royalty for purposes of RAND licensing must be defined and implemented by reference to ex ante competition. In their opinion, a royalty should be deemed reasonable when it approximates the outcome of an ex ante auction process where IP owners submit RAND commitments coupled with licensing terms and selection to the standard is based on both technological merit and licensing terms. In this paper we investigate whether the ex ante auction approach proposed by Swanson and Baumol is likely to deliver efficient outcomes, both from static and dynamic standpoints. We find that given the peculiar characteristics of some of the industries where standardization takes place, in particular the many different business models adopted by innovating companies in those industries, the ex ante auction approach proposed by Swanson and Baumol may not always deliver the right outcomes from a social welfare viewpoint.

RAND, Licensing, Ex Ante Auctions, Reasonable Royalties

Abstract:
Consumers and producers frequently rely on product ratings, such as college rankings, restaurant reviews and bond ratings. While much has been written about the structure of ratings in particular industries, little has been written on the general structure of different ratings industries and whether government intervention is typically needed. This paper begins that inquiry by examining the market structure of different ratings industries, and considering the circumstances under which firms that provide ratings should be regulated. The issue is particularly timely in light of recent calls to rethink the regulation of media ratings and credit ratings.

We find that ratings firms in different industries share several common features. For example, most ratings firms operate in highly concentrated markets. Some factors that could make ratings markets more concentrated include economies of scale, benefits from having a single standard, and general agreement on what should be measured. We also find that most ratings firms determine their own testing standards and methods, although some industries have self-governing oversight bodies that offer their own accreditation standards. While the government regulates firm entry for a few ratings industries, this is relatively rare. The vast majority of ratings firms are unregulated.

We analyze the question of regulation using an economic framework that focuses on the viability and effectiveness of a proposed policy. Despite the finding that many ratings industries are concentrated, our analysis suggests that market forces generally appear to be an effective mechanism for providing consumers and producers with useful ratings. In most cases, such markets do not require government intervention. Moreover, in industries characterized by rapid technological change the government is likely to do more harm than good by intervening. As an alternative to government regulation, voluntary industry oversight bodies may be effective in improving communication between the parties and in improving transparency in rating procedures.

product ratings, rating industries, market forces

Abstract:
The quote in the title refers to a recurring principle in the Antitrust Guidelines for the Licensing of Intellectual Property, issued jointly by the US Department of Justice and the Federal Trade Commission in 1995. That report states that The Agencies' general approach in analyzing a licensing restraint under the rule of reason is to inquire whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects. We apply this standard of evaluation to recent proposals for joint licensing negotiations in standard setting contexts, which have been offered as a solution to the problem of opportunistic licensing and patent hold up. We find that, to the contrary, joint negotiations are not reasonably necessary to prevent hold up. Instead, other more moderate policy solutions that take advantage of existing institutional features within standard setting bodies have a greater likelihood of preventing hold up without running the risk of anticompetitive licensee collusion that is present with joint negotiations. In particular, we posit that standard setting bodies should set voting rules to obtain majority support in the selection of technologies for a standard and should consider means of encouraging ex ante bilateral negotiations. In addition, competition authorities could focus on the enforcement of non-discriminatory licensing as a means of preventing anticompetitive opportunistic hold up.

Standard Setting Organizations, Licensing, Ex Ante Negotiations, Patent Hold-Up

Abstract:
This paper examines arguments for and against the centralization of regulation,using the wireless communications industry as a case study. Several factors suggest that the burden increasingly ought to fall on proponents of decentralization. Scale, scope and network efficiencies are growing in many markets, raising the potential costs of balkanization. And rapid technological change strains the expertise of under-funded, under-skilled local regulators. At the same time, one must be careful not to assume that skilled regulators will necessarily do the right thing. The political context in which regulators operate is often decisive.
With wireless we expect that more efficient outcomes are far more likely with federal than state regulation. We do not believe, however, there is a simple way to generalize about the level of government best suited to regulating from an economic efficiency standpoint. The most that theory can offer here is a disciplined way of thinking about the issue.

Federalism, regulation, free market, Commerce Clause, economic efficiency, market failures, decentralization, market incentives, social cost

Abstract:
Security in software networks relies on technology, law, and economics. As the cost of software security breaches becomes more apparent, there has been greater interest in developing and implementing solutions for different parts of the problem.

In this paper, we provide the first comprehensive assessment of the software security issue that uses a law and economics framework. We begin by offering a definition of software security that illustrates the complexity of the problem. We then review and critique the literature assessing the costs of software security. Finally, we evaluate a number of legal, economic and technical approaches for addressing security problems.

security, software networks, technology, law, economics

Abstract:
In this paper, we consider the issue of natural catastrophe insurance taking Hurricane Katrina as a point of departure. In section II we review Katrina's effects, the estimated losses, what private insurance covered, and what aid the federal government provided. In section III we review the literature on natural catastrophe insurance. We assess the status quo arrangement - a de facto combination of private insurance, post-disaster aid, and government provided or government-sponsored insurance. We also evaluate alternatives. The first is the so-called "layered approach" to natural-catastrophe insurance - a framework in which individuals, private insurers and reinsurers, state-sponsored insurance funds, and the federal government would share responsibility for covering catastrophe-generated losses at different layers of damage. The second alternative proposed is a framework in which the federal government acts not as a reinsurer of last resort but rather as a lender of last resort. We comment on the pros and cons of both of these options. Section IV then concludes.

Hurrican Katrina, Insurance, Natural Catastrophe

Abstract:
In this paper, the authors trace the evolution of the literature on terrorism insurance from its beginnings in the post-World War II era through to the present debate over international terrorist events in the new millennium. As part of that review, they examine the efficacy of programs undertaken in various countries - including TRIA in the United States. Finally, the authors evaluate the likely efficacy of recommendations made by academics and policymakers for new ways of dealing with terrorism insurance.

Insurance, Terrorism, Regulation, TRIA

Abstract:
In this paper we summarize the motivations for enacting the Terrorism Risk Insurance Act (TRIA) and provide a brief description of its provisions. We then turn to the controversy over TRIA's extension. Multiple views over the role of government in terrorism insurance have been expressed in both the academic and the popular literatures. Even the federal government is divided concerning the efficacy of TRIA. We cull what lessons we can from the debate and its many points of view. We conclude that TRIA has served a useful purpose as a temporary stopgap measure, allowing the industry much needed time to regroup in the face of a dramatically altered risk landscape.

TRIA, Terrorism, Regulation, Insurance

Abstract:
Several scholars have suggested that states should play a much more limited role in antitrust enforcement, especially in matters that are national or global in scope. In this paper, we analyze the states' part in the Microsoft case - a case that illustrates the costs of state intervention in antitrust matters that extend beyond state borders. Here, the states' involvement lengthened the lawsuit, complicated the settlement process, and increased both legal uncertainty and litigation costs. These results followed from the states' focus on parochial interests rather than broader concerns for efficiency and equity. We conclude that a state's antitrust enforcement authority should be restricted in matters that extend beyond its borders.

After analyzing the motivations for state behavior in federal antitrust, we consider whether restrictions should apply to federal antitrust authorities in cases with international implications. Though a global competition authority could, in principle, be designed to maximize economic well-being, practical and political obstacles appear to rule this option out, at least in the short term.

antitrust, federalism, states, enforcement

Abstract:
This paper investigates the economic and empirical foundations of the evidence relating earnings to schooling quality. We replicate the Card-Krueger model for Census years 1970, 1980 and 1990 and find that it consistently produces a strong relationship between schooling quality and the rate of return to schooling. We test key identifying assumptions used by Card and Krueger and others. Several assumptions are rejected. When they are relaxed, the evidence for a strong effect of schooling quality on earning is greatly weakened. A crucial identifying assumption is the absence of selective migration on the basis of earnings. Nonparametric tests strongly reject this hypothesis. The conventional assumption of linearity of the earnings- schooling relationship widely used in the literature is also rejected. The only surviving evidence of any schooling quality effect is in the return to college education. We also test and reject conventional efficiency unit models of the pricing of labor services. The empirically concordant model of earnings is a model of heterogeneous human capital in which regional shocks affect the prices of less- skilled labor.

Abstract:
This paper examines the economic and empirical foundations of the aggregate evidence on the effect of schooling quality on earnings. A common framework is presented which nests all previous studies as special cases. We discuss two crucial identifying assumptions and test them. The first assumption is the absence of region of birth - region of resident interactions in the return to schooling. This rules out patterns of migration on the basis of realized earnings in the destination state. Both parametric and nonparametric versions of this hypothesis are tested. Using 1970, 1980 and 1990 Census data, it is decisively rejected. A second assumption is that log earnings equations are linear - or nearly linear in schooling. This assumption is false. We find that estimated earnings-quality relationships are sensitive to specification of the earnings function. When false linearity assumptions are relaxed, the only effect of measured schooling quality is on the returns for college graduates. The evidence for an aggregate earnings-quality relationship is weak once false empirical restrictions are relaxed.

Abstract:
The Supreme Court's 2006 eBay ruling marked a turning point in injunctive relief policy. Unfortunately, there seems to be considerable confusion about the implications of the decision. Some authors, concerned over patent holdup and excessive royalty rates, interpret the eBay decision as giving a green light to district courts to deny injunctive relief to “non-manufacturing patent owners.” Using an error-cost framework, we examine the theory and evidence behind patent holdup concerns as they relate to injunctive relief policy. We find that the holdup theory justifying categorical limitations on injunctive relief rests upon overly narrow assumptions. As a result, categorical limitations are likely to result in substantial “false positives,” where patent holders with no designs of patent holdup are nonetheless denied injunctive relief. Instead of advocating categories of denial, we argue that the majority opinion in eBay can and should be read as a return to a balancing test, where costs and benefits are weighed carefully before granting or denying a patent injunction.

K20

Abstract:
A few recent contributions have claimed that in high-tech industries—where innovation is often cumulative and products include many components which are protected by patents in the hands of many different patent holders—the cost of obtaining all necessary licenses is too high. Some have even requested sweeping policy reforms to deal with the so-called royalty stacking problem. In this Essay we find that the empirical evidence—including new evidence for the 3G telecom industry—does not corroborate the gloomy predictions of the proponents of the royalty stacking hypothesis. A careful look at the theoretical underpinnings of this hypothesis explains the lack of empirical support. First, three necessary conditions must be satisfied for a royalty stacking problem to exist: (a) innovation must be cumulative, so that the patents are complementary; (b) there must be many patents for a given product; and (c) the many patents must be held by numerous, distinct rights holders. Second, royalty stacking may not be a problem even if the three necessary conditions are met; i.e., the three necessary conditions are not sufficient. And, third, several market mechanisms, such as cross licensing or voluntary patent pools, can be used to mitigate the costs of multiple concurrent patent negotiations. We conclude that the so-called royalty stacking problem is more myth than reality and that there is no reason to adopt the dramatic reforms in antitrust and patent law that have been recently proposed by, inter alia, Lemley and Shapiro (2006).

excessive royalties, hold up, innovation, mobile telecommunications, patent licensing

Abstract:
RAND commitments - i.e., promises to license on reasonable and non-discriminatory terms - play a key role in standard setting processes. However, the usefulness of those commitments has recently been questioned. The problem allegedly lies in the absence of a generally agreed test to determine whether a particular license satisfies a RAND commitment. Swanson and Baumol have suggested that the concept of a 'reasonable' royalty for purposes of RAND licensing must be defined and implemented by reference to ex ante competition. In their opinion, a royalty should be deemed 'reasonable' when it approximates the outcome of an ex ante auction process where IP owners submit RAND commitments coupled with licensing terms and selection to the standard is based on both technological merit and licensing terms. In this paper we investigate whether the ex ante auction approach proposed by Swanson and Baumol is likely to deliver efficient outcomes, both from static and dynamic standpoints. We find that given the peculiar characteristics of some of the industries where standardization takes place, in particular the many different business models adopted by innovating companies in those industries, the ex ante auction approach proposed by Swanson and Baumol may not always deliver the right outcomes from a social welfare viewpoint.

auctions, fairness, licensing, standard setting