Putting Economists in Their Place in Patents in Telecoms and the Internet of Things

I participated as a panelist in a session entitled, "Economists: Do They Have a Place?," at the Patents in Telecoms and the Internet of Things conference at George Washington University in Washington, D.C. on November 10, 2017. This article is substantially my remarks in that conference panel session. Before my remarks, Stephen Haber of Stanford University said that I had posed the defining question for the entire conference in an audience question-and-answer exchange the previous day. It had perturbed me to hear a panel speaker mischaracterize the communications standards as platforms of preexisting technologies upon which Internet of Things (IoT) innovation will occur. In response, I said that communications standards are rich in technology innovation and patented intellectual property. I asked: if the developers of standards are to be deprived of sharing any of the value in the standards, then who is entitled to derive that value, and who in fact is capturing that value? Although flattered by Haber's comment, I also believe a most fundamental and important question is the one that my co-panelist, Alan Marco, the former chief economist of the U.S. Patent and Trademark Office, framed: how well is the market functioning? By analogy, how best to grow the pie is as important as deciding how to divide it when there are competing hungry mouths to feed.¹ The markets for cellular technologies, products and services have performed exceptionally well with innovation, growth and vigorous competition in supply on the basis of existing patent licensing arrangements.²

I. The Perils of Overreach

On the central question, "Do economists have a place?," my answer is yes - to make astrologers look good!³ Such is the popular skepticism about the accuracy and reliability of economists with their theories, analysis, opinions, and forecasts.

We do need economists, but they need to be applied carefully because using one does not guarantee that the right answer will prevail or that old economic theories will continue to hold under new conditions. Celebrated playwright George Bernard Shaw once famously quipped: "If all economists were laid end to end, they would not reach a conclusion." Look at competing theories in macroeconomics - for example, John Maynard Keynes versus from Milton Friedman. Their differences are significantly a matter of economic philosophy or even ideology. The economics of patents in telecoms and the IoT is also susceptible to such biases.

Economics is sometimes negatively called the "dismal science." But at least that is a reminder that economics is indeed supposed to be a science, and therefore it should be practiced with adherence to scientific principles, including hypothesis testing in a controlled manner with empirical evidence. Unfortunately, a lot of what we see from economists in the standard-essential patent (SEP) licensing debate and in litigation is hocus pocus-that is, sleight of hand or trickery, in which these principles are inadequately applied or brazenly disregarded. Some dodgy economic concepts are inherently untestable: for example, Daniel Swanson's and William Baumol's ex ante auctions to set patent licensing rates in which technology owners would offer their essential intellectual property (IP) for inclusion in a standard in a sealed-bid process.⁴ This auction would supposedly ensure (the bizarre and unreasonable objective, in my opinion) that the price paid for the IP is no more than the incremental value over the price of the next-best alternative, even if that increment is close to zero because two rival technologies are of approximately the same (significant) value.

In some cases, economists make things up, and it then becomes dictum from judges without significant public and academic debate. For example, I see no reason why all the value of a standard should accrue to implementers rather than to technology developers, as is commonly asserted. I have never seen any analysis quantifying pass-through of benefits (including cost savings) to end-users. That is why I posed my above mentioned question to the panel speaker the preceding day of the 2017 conference.

The problem is insufficient diligence or accountability for the theory, data, and analysis the economists develop or adopt (for example, from other experts). Shortcomings among economists include various forms of overreach, including the following.

A. Application of Theory Beyond Its Proven Applicability

At the Patents in Telecoms conference in 2015, Nancy Rose, the Deputy Assistant Attorney General for Economic Analysis at the Antitrust Division of the U.S. Department of Justice, riffed on the existence of patent holdup by saying it was like invisible dark matter in the universe.⁵ She presented a hypothetical case concerning the construction of an oil or gas terminal and a pipeline to connect it, but she failed to show that holdup has actually occurred in licensing SEPs, let alone any empirical evidence that there is a significant or systemic problem.

Another example is the old Cournot-complements theory, which explains pricing in brass making.⁶ That theory is the basis of royalty-stacking allegations in patent licensing. My empirical research shows aggregate royalties to be around five percent for mobile phones, which is far lower than stacking theory predicts.⁷ In our session, Stephen Haber mentioned that he independently validated my methodology and results, as Gregory Sidak has also done.⁸

B. Economists Reaching Beyond Their Analytical Competence

Economics is a broad field, and it neighbors or overlaps many others. Experts need to recognize the limits of their expertise in the same way that lawyers and physicians typically stick to their specializations. Analysis of pass-through, measuring the extent to which value and costs are transferred along the value chain downstream from producers through intermediaries such as product manufacturers to consumers, is for specialized economists using empirical analysis. Nevertheless, some economists commonly make unfounded and contradictory claims, depending what suits their purpose at one time or another. For example, without evidence or analysis, they assert that, if patent fees are not reduced, many manufacturers will go bust due to all the additional expense because most of them are already making no money. Or, they say, patent fees need to be moderated because the resulting product costs result in higher prices that harm consumer welfare. Are value and cost passed on to end-users, or do they stay with the intermediaries?

C. Economists Relying on the Data and Analyses of Others That Are Inadequately Formulated and Unreliable

. . .Continue to read rest of article (PDF).