Markets, bright-line tests and the IP owner

The March 2008 issue of Oxford University Press's quarterly Journal of Competition Law & Economics has just been published. Although much of its content is aimed at mathematically-minded economists rather than policy- and strategy-oriented intellectual property experts, its subject-matter inevitably converges with the interests of that group.

Of particular interest to readers of this weblog is "Economic analysis and "bright-line" tests" by Franklin M. Fisher (Jane Berkowitz Carlton and Dennis William Carlton Professor of Microeconomics, Emeritus, Massachusetts Institute of Technology). According to his abstract,

"Economists testifying in antitrust cases often encounter the demand by attorneys and judges for "bright-line" tests – simple rules supposedly based on economic analysis. This paper argues that, although such tests can have their uses, they are very likely to lead to error without a clear understanding of the purposes of the tests and the economics behind them. Issues discussed include: market definition, market share, the role of profits, and, especially, anti-competitive conduct (including the Areeda-Turner) test for predatory pricing. Examples are drawn from actual court cases (mostly in the U.S.), in many of which the author was an expert witness. The best known of these was the U.S. case against Microsoft, but there are many others".

I believe that bright-line tests are invaluable, however unscientific they may appear to a pure economist. This is because, essentially, the economist measures anticompetitive conduct retrospectively and on the basis of data that has been brought into existence on the basis of, for example, the successful exploitation of a patent monopoly. He has the luxury of epistemological meditation upon the different methods of establishing an ex-post-facto conclusion as to what a "relevant market" is and to whether that market has been subjected to abuse by an IP rights holder. Businesses themselves do not have this luxury, because -- at the time they enter a new market or seek to vary their conduct within an existing one -- the database of facts upon which their market activity will be approved or condemned has not yet come into existence. If they are forced therefore to conduct their business on the basis of generalised principles, rules of thumb and bright-line methodologies, it seems almost unfair that they should not also be judged by them.

You can peruse the contents of the current issue of this journal here.