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IP As A Market Tool And Its Relation With Competition

Intellectual property rights grant the owners exclusive legal rights, limiting others access to the same, and thus reducing market competition. Competition law or the anti-trust law on the other hand, seeks to promote competition and increase market access.

As competition law deals with an efficient mechanism to counter anti-competitive agreements, regulating mergers and acquisitions, restricting the use of dominant position etc. On the contrary Intellectual Property Rights tries to strike a balance between the rights of the owner and social interest. It helps the owner of the intangible property gets exclusive right and commercial value for his intellectual creation.

IP As A Market Tool & Its Relation With Competition

From competition law point of view Intellectual property rights is viewed as a means to reduce competition. Intellectual property rights gives right holder a right hindering other from offering the protected product to the market in competition with the Intellectual property right holder. Intellectual property right may also used to restrict competition between licensees given the right to produce a protected product.

Efficiency goals can be divided into two. They are Static efficiency and Dynamic efficiency. In static efficiency there is no huge profit or change everything is at equilibrium. For example, in case of patent, after the expiry period that is 20 years that patented product or process became affordable and accessible to the public as whole.

In Dynamic efficiency there is a spontaneous and discontinuous change and there will be huge profit. Efficiency here means the economic efficiency. Competition furthers both static and dynamic efficiency but does not necessarily maximize both. In market structures with many small suppliers competing fiercely, resources will be allocated in an efficient way, but that fierce competition between many small suppliers will limit the capital available for innovation that is the static efficiency.

On the other hand, the suppliers will have greater possibility and incentives to invest in research and development & more concentrated markets may thus be more innovative. This does not mean that inventors should be protected against competition and given a monopoly. IP right holders must be pressed to further technological improvements and innovations.

To do this there must be a certain degree of competition on the market that is the dynamic efficiency. Economic theory tells that market structure has influence on dynamic efficiency, & that has implications for the regulation of market conduct.

Dynamic Efficiency As A Common Goal

Intellectual property rights are a legally enforceable power to exclude others from using a resource with no need to make contracts with would be users of the resource forbidding their use. Intellectual property rights protect the right holder from others taking over and reaping the rewards from his or her intellectual or marketing efforts, that is from free-riding on these efforts. An inventor invests time and resources in research and development activity hoping that the result will be an invention that will have an economic value exceeding the investment.

An author is only able to invest time & effort in writing if the book in the end will give him an income. A trade mark owner will only invest in promoting a trade mark if this gives added value to the products sold under the trade mark. If the innovator is not given some exclusivity to his or her innovation, and others are allowed to use the knowledge for free, the innovator will not be able to recoup the often-large investments connected with research and development activities.

Intellectual property rights give the innovator the exclusive right to utilize the new knowledge an innovation results in, and this gives potential innovators economic incentives to innovate. Research and development activities are connected with large investments.

To recoup the investments and to earn an acceptable rate of return on the investments, exclusivity regarding the utilization of new knowledge is a prerequisite. When regulating the exercise of intellectual property rights in intellectual property law, for instance the duration of intellectual property rights, the rule maker thus has to balance the gains Intellectual property rights give society by encouraging creation and dissemination of new knowledge against the costs the reduction in competition and higher prices that intellectual property rights lead to. This balancing approach is the same approach used under competition law when regulating the exercise of intellectual property rights.

Dynamic efficiency is a common aim for both competition rules and intellectual property rules, and the regulation of the exercise of intellectual property rights under the two sets of rules can be based on a similar balancing approach. Both bodies of law share the same basic objective of promoting consumer welfare and efficient allocation of resources.

Innovation constitutes an essential and dynamic component of an open and competitive market economy. Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes.

Theory Of Complementarily

Dynamic efficiency is a common goal for Competition law and Intellectual property law, both laws are not fully complementary for two reasons. They are:
  • Competition law has traditionally focused primarily on static competition and the allocation of resources and not taken into account the effects of conduct on dynamic competition and dynamic efficiency. Even if competition law and IP law share dynamic efficiency as a common goal, the supremacy of static efficiency in practice has created a conflict.
  • Competition law characterizes as non-economic goals because it is not profit-oriented; IP law is based on 'populistic' goals in addition to economic goals. To the extent that IP laws have goals differing from the goals of competition law, there is a conflict between the two areas of law; it is only possible to develop a common frame of analysis if the goals are common.

    Differing goals could be used to argue that it is not possible to reconcile Intellectual property law and Competition law. A conflict between Intellectual property law and competition rules must, in that case, be solved by formal rules giving either intellectual property law or competition law primacy over the other.
The Theory of complementarity advocated by the Commission argues that competition law and IP law do not only share common goals, but that competition as the driving force behind the market mechanism also furthers innovations. Competition is thus a means to further both static and dynamic efficiency. Competition does so by putting pressure on competitors to innovate.

Both intellectual property rights and competition are necessary to promote innovation and ensure a competitive exploitation thereof. According to the views of the European Commission Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes.

If conduct based on an IPR reduces the incentives to invest in R&D activities, it seems to follow from the Commission's concept of dynamic competition that the conduct should be viewed as a restriction on dynamic competition. The concept of dynamic competition seems to have the view that competition furthers innovation 'by putting pressure on undertakings to innovate. Holders of IPRs must face competition in the market to have an incentive to compete for new markets.

Article 81 of the European Community Treaty (Ex Article 85)

  1. The following shall be prohibited as incompatible with the common market:
    • all agreements between undertakings, decisions by associations of undertakings, and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:
      1. directly or indirectly fix purchase or selling prices or any other trading conditions;
      2. limit or control production, markets, technical development, or investment;
      3. share markets or sources of supply;
      4. apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
      5. make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
  2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.
  3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
    • any agreement or category of agreements between undertakings;
    • any decision or category of decisions by associations of undertakings;
    • any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
      1. impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
      2. afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

Article 82 of the European Community Treaty (Ex Article 86)
Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in:
  1. directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
  2. limiting production, markets or technical development to the prejudice of consumers;
  3. applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
  4. making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
Article 81 & 82 is not in conflict. It can be argued that competition law & Intellectual property law share the same economic objectives. Economic goal of Article 81 & 82 is the protection & promotion of effective competition leading to effective market performance. Article 81 & 82 do not protect competition for its own sake, but because efficient markets offer a diversity of products at the lowest price. It is in the interest of society that competition, as the driving force behind the market mechanism, should lead to efficient market performance.

It is in the interest of consumers that competition put pressure on suppliers forcing them to share the surplus resulting from efficient performance with consumers in the form of lower prices, & put pressure on suppliers to invest in research & development to promote innovations. Innovation is the main source of increases in economic welfare.

The objective of Article 81 is to protect competition on the market as a means of enhancing consumer welfare & ensuring an efficient allocation of resources. European Community Treaty Article 81 & Article 82 protect the market mechanism from anti-competitive conduct. If national legislation on IPRs gives the right holders the possibility to restrict competition, the logical response from European community Competition rules is to censor anti-competitive conduct based on Intellectual property rights.

In Article 81, all agreements involving intellectual property rights would be contrary to Article 81(1) if they restrict competition in a static sense. When assessing licensing agreements, the sole focus under Article 81(1) would be whether the agreement in question restricts inter-brand or intra- brand competition. In a static perspective it would for instance not be relevant to take into account that licensing agreements secure the inventor from free-riding.

Dynamic efficiency is the production of new knowledge leading to innovations. The pressure to innovate comes from the market, or from outside the parties to an agreement that restricts competition, but if the pressure from static competition is too strong this may influence negatively the possibility to invest in Research and development.

Article 82 European community prohibits undertaking with a dominant position on the relevant market from abusing their market position. The exclusivity of an intellectual property rights may result in a dominant market position for the right holder. If an intellectual property right makes it possible to produce a product superior to other products, and other suppliers do not have access to the knowledge protected by the intellectual property right, the holder of intellectual property right can have dominant position in the technology market & in the markets for products produced with the superior technology.

But Intellectual property rights do not necessarily secure for the holder a de facto monopoly or dominant position in the technology market or in the product market. There may be alternative technologies or product substitutes that are viewed by the consumer as equally good.

This must be decided based on a definition of the relevant market. In cases where IPRs put the right holder in a dominant market position, the question arises whether the holding, acquisition or exploitation of Intellectual property rights can constitute an abuse of a dominant position. Dominant undertaking uses an intellectual property right to reduce competition this may constitute an abuse contrary to Article 82.

Competition law and Intellectual Property law are the two main areas of law that govern the market and promote consumer welfare and transfer of technology. The relationship shared between intellectual property rights and competition law plays a very vital role in ensuring the maintenance of a competitive and dynamic economic market. They have many similarities and are often complementary to each other and are two sides of the same coin.

Competition law tries to offer wide varieties to the customer and it brings the balance between the right of the manufacturer and the customers by maximizing profit with a quality product at affordable prices. IPR also allows the manufacturer to get the reward for the sole creation of the product which in turn will help the public at large. The monopoly position offered by the IPR is prima facie not violating the competition policies but misuse of the position can be violating the policies.

  • Drexl, Josef. Research Handbook on Intellectual Property and Competition Law. Edwar Elgar Publishing, 2010.
  • U.S. Dep't Of Justice & Fed. Trade Comm'n, Antitrust Enforcement And Intellectual Property Rights: Promoting Innovation And Competition (2007).
  • European Community Treaty 1957
  • TRIPS Agreement 1994

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