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Abuse of Dominantposition and Switching Costs UNIVERSITY OF LONDON REFUSAL TO LICENSE: ABUSE OF DOMINANT POSITION AND SWITCHING COSTS NET LE SUBMITTED TO THE LAW DEPARTMENT OF THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE FOR THE DEGREE OF DOCTOR OF PHILOSOPHY LONDON, MAY 2004 U /« 3 L \ * f LONDIU) \ WtfV. / UMI Number: U615726 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615726 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 Th e s e s F 353£ . Library British Library of Political and Economic Science IJW 5S 5 II ACKNOWLEDGEMENT Foremost, I wish to express my deep gratitude to my supervisors, Professor William T. Murphy and Mr. Andrew Murray for their continual support throughout this thesis. Their comments have helped to essentially improve the accuracy of my research. Further, I wish to thank Mr. Giorgio Monti for reviewing my drafts, sharing with me books, giving me invaluable feedback and assistance. Others from LSE whom I would like to thank include Doctors Carsten Sorensen and Ole Hanseth (Department of Information System), Professors Max Steuer, Dany Quah and Michele Picione (Department of Economics) for reading my drafts, generously sharing with me their knowledge, improving my understanding and moreover providing me with excellent research inspiration. I am also indebted to Professors Robert Cooter and Pamela Samuelson from UC Berkeley for introducing me a fascinating area of economic research on copyright issues. Special thanks are due to Professor J.A.L. Sterling and the lecturers of intellectual property law from Queen Mary University of London whom I met in the first year of this research, Professors David Lange from Duke University and Lisa Takeyama from Amherst College for inspiring discussions. I have had the benefit of a practice period in 2004 at Clifford Chance Brussels with Mr. Thomas Vinje and assistance from Mr. Nicolas Banasevic from the DG Competition of the European Commission, who has explored with me the possibility of applying the switching costs argument to the EC investigation against Microsoft. I would like to thank John Willens, Sarah Tumock and Ba Chu for removing many linguistic errors. Last but not least, my heartfelt thanks go to my parents Hung and Tinh, my wife Van and her parents for all their love and strong support from Vietnam over the years of doing research, to my little daughter Phuong Mai for cheering up the whole family while I am away. This thesis is dedicated to her second Birthday. Financial support by the Ministry of Education and Training of Vietnam, the London School of Economics, the Law College of Ho Chi Minh City and Baker & McKenzie are gratefully acknowledged. Without these, my work would not have been completed. Ill ABSTRACT The question of this thesis is: “when is the rightholder’s refusal to license a software interface an abuse of dominant position?” Using the principles of law and economics, I will approach this question from the consumers’ perspective. The critical themes of this thesis are the distinction between innovative/non-innovative markets and the role of indirect switching costs of consumers in anti-abuse cases. Developing the studies of Klemperer (1987) and other authors on switching costs, I hypothesise that a dominant software incumbent abuses his market power if he prejudices consumers without justification. The consumers will suffer a detriment when their switching costs S)( are higher than the maximum utility surplus brought to the consumers by an entrant’s product(Max AU), or when the incumbent intentionally raises switching costs without justification. To remedy this, the incumbent should grant the entrant a license to access any interfaces or data formats which could reduce S. A refusal to license may result in an abuse, unless it is justified on the grounds of sunk costs and free riding. The decision to grant should be made by striking a balance between the costs and the benefits of granting access, in a process whereby both the entrant and the incumbent share the burden of proof - the essentiality-justification mechanism. Cost-benefit analysis, case studies, information system study, game theory, expected utility and probability assessment are the toolkit in this research. IV TABLE OF CONTENTS A b st r a c t ...................................................................................................................................... iii Fig u r es ........................................................................................................................................ viii Cases , Decisions and Statutes ...............................................................................................1 A bbreviation ................................................................................................................................7 Gl o ssa r y ......................................................................................................................................10 INTRODUCTION............................................................................................................1 Main Question and Issu e s ........................................................................................................1 H ypothesis , Counter -A rguments and Contributions ................................................3 M eth odo lo g y ...............................................................................................................................7 CHAPTER I: SOFTWARE AND THE MICRO-INFRASTRUCTURAL ELEMENTS...................................................................................................................15 1.1 Copyright and Competition Law in the Softw are Se c t o r .......................... 15 1.1.1 Copyright Law and Software........................................................................15 1.1.2 Competition Law and and Regulatory Approaches................................... 21 1.1.3 Abuse o f Dominant Position and Competition on the Merits ................... 26 1.2 Relevant Economic Concepts ..................................................................................31 1.2.1 Freedom o f Choice and Efficiency ...............................................................31 1.2.2 The Economic A nalysis o f Software Copyright...........................................37 1.3 Software Sector , N etwork Effects and Compatibility ............................. 40 1.3.1 Network Effects, Public Goods and Durable Goods ..................................40 1.3.2 Software and Network Effects...................................................................... 43 1.3.3 Interfaces and Data Formats ....................................................................... 47 1.4 Software and the M icro Infrastructural E l e m e n t s ..................................49 1.4.1 Critical Mass and Network Effects ..............................................................49 1.4.2 The Micro Infrastructural Elements ............................................................50 1.4.3 Social Norm: ‘Private Sector Should Lead”..............................................51 1.4.4 Social Norm: “ Write Once, Run Anywhere versus Spend Once, Use Anywhere ”....................................................................................................52 1.4.5 The Role o f Positive Feedback in Developing Networks ..........................55 1.5 Refusal to MIE L icense and its Effects on C onsum ers .............................. 57 1.5.1 Market Power in the Software Sector......................................................... 57 1.5.2 Leverage of Market Power vs. Competition on the Merits ....................... 63 1.5.3 Leverage o f MIE Power and Consumer Welfare ....................................... 64 C onclusion .................................................................................................................................. 69 CHAPTER II: RETHINKING CURRENT ANTI-ABUSE MEASURES............... 71 2.1 Economic A r g u m en ts ..................................................................................................72 2.1.1 The New Economy and ‘Innovation D efen ce ............................................ 72 2.1.2 Reflexivity o f the New Economy Theory ......................................................74 2.2 A nti-A buse M e a su re s in C o p y rig h t L aw .............................................................76 2.2.1 The Expression-Idea Dichotomy...................................................................76 2.2.2 Reverse Engineering..................................................................................... 79 2.3 Competition M easures against A busive R efusal to License .....................85 2.3.1 The Essential Facilities Doctrine in the US and Europe...........................86 2.3.2 Challenges Against the Essential Facilities Doctrine................................89 V 2.3.3 Other Anti-A buse Measures .......................................................................... 91 2.4
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