Standard Setting, RAND Licensing and Ex Ante Auctions: The Policy Implications of Asymmetry

Damien Geradin, Partner at Howrey LLP and a Professor of Competition Law and Economics and a member of TILEC at Tilburg, Anne Layne-Farrar, economist at LECG Consulting, and Jorge Padilla, economist at LECG Consulting and Research Fellow at CEMFI and CEPR

7/25/2008
(Original Publish Date: 12/5/2007)

Standard setting organizations may in some circumstances confer market power on participants whose patented technologies are included in standards. Promises to license on reasonable and non-discriminatory (RAND) terms play a key role in mitigating any such market power, but 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 (2005) 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 cost. This test has recently been adopted by the Federal Trade Commission in Rambus. In this paper we investigate whether an ex ante auction approach is likely to deliver efficient outcomes, both from static and dynamic standpoints. Applying lessons from the economics literature on auctions, we find that due to several forms of asymmetry characteristic of the industries where standardization takes place the ex ante auction approach is not likely to deliver the right outcomes from a social welfare viewpoint.