Standard setting, RAND licensing and ex ante auctions: The implications of asymmetry

Standard setting organizations may in some circumstances confer market power on participants whose patented technologies are included in standards. Promises to license on reasonable and non-discriminatory (RAND) terms play a key role in mitigating any such market power, but the usefulness of those commitments has recently been questioned. The problem allegedly lies in the absence of a generally agreed test to determine whether a particular license satisfies a RAND commitment. Swanson and Baumol (2005) have suggested that ldquothe concept of a dasiareasonablepsila royalty for purposes of RAND licensing must be defined and implemented by reference to ex ante competition.rdquo In their opinion, a royalty should be deemed ldquoreasonablerdquo when it approximates the outcome of an ex ante auction process where IP owners submit RAND commitments coupled with licensing terms and selection to the standard is based on both technological merit and licensing cost. This test has recently been adopted by the Federal Trade Commission in Rambus. In this paper we investigate whether an ex ante auction approach is likely to deliver efficient outcomes, both from static and dynamic standpoints. Applying lessons from the economics literature on auctions, we find that due to several forms of asymmetry characteristic of the industries where standardization takes place the ex ante auction approach is not likely to deliver the right outcomes from a social welfare viewpoint.