Technological Standards, Innovation, and Essential Facilities: Toward a Schumpeterian Post-Chicago Approach

Abstract:     
In this essay, I attempt to take seriously Schumpeter?s perspective on competition as fundamentally about innovation. Drawing on literatures that concern themselves centrally with the patterns and processes of technological change, I focus on a set of issues very much on the present-day agenda: antitrust policy toward network industries in which technological standards are important. As both scholars and legal cases have suggested, one might logically view a set of standards as an ?essential facility? ? a technological bottleneck ? for those who wish to connect to the network.

I attempt to define the limits of the standard price-theoretic account for understanding the problem of essential facilities and offer instead a perspective drawing on the theory property rights in a regime of innovation. Contrary to what is suggested by traditional economic analysis, I argue that, as a logical matter, refusals to deal by essential-facility monopolists are not always equivalent to the exercise of existing monopoly power through price, and there are good theoretical reasons for an essential facility doctrine to concern itself with refusals to deal even when it fails to touch other exercises of market power by a legally acquired monopoly. I introduce the concept of the scope of an essential facility, understood in analogy with a similar concept in the economics of patents, and suggest that the degree to which antitrust policy should concern itself with the ownership or control of a technical standard ought to be proportional to the scope of the standard.

At the same time, however, a Schumpeterian perspective reminds us that, in a world of dynamic technological competition, even possession of a standard with wide scope may afford only temporary protection, and the winds of Schumpeterian creative destruction may be a better antidote to monopoly than the cumbersome and interest-laden processes of antitrust law and policy. Nonetheless, the notion of the scope of a standard may prove useful in many cases, including those involving regulated (or formerly regulated) industries or involving tradeoffs in intellectual property rights.

JEL Classifications: L1, L4, L5

Working Paper Series