The CP harms competition, innovation, and leadership.
Wong-Ervin and Wright 16 – Director of the Global Antitrust Institute and Adjunct Professor of Law at George Mason University, J.D. from the University of California College of the Law; former Commissioner of the Federal Trade Commission, Professor of Law at George Mason University, PhD in Economics and J.D. from the University of California, Los Angeles.
Koren W. Wong-Ervin and Joshua Wright, “Intellectual Property and Standard Setting,” The Federalist Society Review, 12-05-2016, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2878955
After the investments of time, money, and competitive effort required to spur breakthrough inventions have already been made and proven successful, it can be tempting to carve up the benefits and distribute them throughout the economy. Doing so, however, would harm competition, innovation, and consumers in the long run. If the government has demonstrated that it is too willing to step in and appropriate the gains from innovation and dynamic competition, then potential innovators anticipating such interventions will have weak incentives to risk investment in new inventions. In addition, the costs of Type I errors (i.e., false positives) leading to a chilling of procompetitive innovation are significant.13
With respect to standard setting in particular, the economic goals are complex and involve important benefits and costs. Two primary types of standards are those that set minimum performance levels and those that guarantee interoperability. The former type of standard often serves to inform consumers and facilitate quality assurance by ensuring that products meet a minimum level of performance or quality. Interoperability standards guarantee that products made by different companies are compatible with other products that incorporate the standard, generating significant consumer benefits when the standard is widely adopted. Interoperability can also reduce the costs of production by reducing firms’ costs of acquiring technical information, thus simplifying both the design and production of products that incorporate the standard. The benefits of interoperability are magnified in “network” markets, where the value of a product or service to an individual consumer is dependent upon the total number of consumers that adopt compatible products. On the other hand, adoption of uniform standards can have potential costs. In the absence of property rights to technology included in standards, the adoption of a uniform standard may create incentives for free riding and suppress incentives for firms to improve on the current standard or create alternative standards. As a result of these effects, individual firms’ choices to adopt competing proprietary standards using incompatible technology may increase welfare relative to use of a mandated standard. This result highlights the importance of IPRs to standards, namely that the absence of IPRs for standard technologies can lead to the underproduction of those technologies and may deter investment in research and development and reduce the quality of the final product.14