Unilateral Conduct Relating to Standards

• Pages: 75-93

75

CHAPTER III

UNILATERAL CONDUCT

RELATING TO STANDARDS

While standards often emerge as a result of collective action by a

tr

ade association,

an

SSO, or

an

other group of firms, standards (or

something similar) may emerge in the absence of any collective activity.

The unilateral actions of a single firm may lead to a single “de facto”

interface specification, communications protocol, or

an

other set of

informal rules becoming dominant. The “market”—the aggregated

decisions of many potential users—may transform a single firm’s

protocols or specifications into a de facto standard. This chapter refers to

“de facto” standards as standards in the informal sense, despite their

being created without organized public or private deliberation.

The process by which the market selects a de facto standard is often

complex and unpredictable, and the standard that emerges may not

always be the “best” from a purely technical perspective. Moreover,

ex

ante

, it is not even clear whether a market will gravitate toward a single

standard or instead support multiple standards.

Standards adopted by the market include the Microsoft

Windows

operating system and the IBM “clone” PC. Similarly, the market

ultimately adopted the VHS standard for video players and tapes instead

of the alternative Sony Betamax standard. At one time or another, the

IBM

mainframe computer and Kodak cameras and film may have

con

stituted de facto standards.1 No trade association, industry group, or

government agency formally adopted these technologies as standards.

Instead, these standards emerged as a result of a competitive process with

other alternative standards.

De facto

standards

—just like standards set cooperatively—

may

generate substantial efficiencies and benefits for consumers and

competition. Nevertheless, the process by which the market gravitates

toward and adheres to a standard may raise antitrust concerns. This is

particularly true in industries characterized by so-called network

effects

—i.e., industries where the value of a standard to a user increases

1

.

See, e.g., Berkey Photo v. Eastman Kodak Co., 603 F.2d 263, 279 (2d

Cir. 1979) (plaintiff alleges that “Kodak, a film and camera monopolist,

was in a position to set industry standards. Rivals could not compete

effectively without offering products similar to Kodak’s.”).

76

Handbook on the Antitrust Aspects of Standard Setting

as more users select the standard.2 An example of network effects is the

telephone network, in which the value to one person of owning a

telephone increases with the number of people that person can call. In

such industries, there may be a tendency for the market to “tip” to one

standard to the exclusion or virtual exclusion of others, potentially giving

the firm that owns or controls the standard market power or even

monopoly power, and raising barriers to entry for new firms.3 Under

these circumstances, the critical issue is whether the market was

permitted to select the optimal standard on the merits, or whet

her

anticompetitive or exclusionary conduct influenced the market to select

and maintain a standard based upon factors unrelated to the value of the

standard.

Unilateral conduct in the setting or maintenance of a standard is

sometimes challenged under Section 2 of the Sherman Act as

monopolization or attempted monopolization.4 The elements of the

offense of monopolization are (1) the possession of monopoly power in a

relevant market and (2) anticompetitive conduct, i.e., the willful

acquisition or maintenance of that power (as distinguished from power

acquired through superior products, business expertise, or by accident).5

The elements of attempted monopolization are (1) the use of predatory or

anticompetitive conduct in a relevant market with (2) a specific intent to

2

.

See

United States v. Microsoft Corp., 253 F.3d 34, 49 (D.C. Cir. 2001)

(in network markets, “the utility that a user derives from consumption of

the good increases with the number of other agents consuming the

good.”) (quoting Michael L. Katz & Carl Shapiro, Network Externalities,

Co

mpetition and Compatibility,

75

AM. E

CON

. R

EV

. 424, 424 (1985)).

But see William J. K olasky, Network Effects: A Contrarian View, 7 G

EO

.

M

ASON

L.

R

EV

.

577 (1999) (arguing that positive economies of scale play

a larger role than network effects, even in hig

h-

technology markets).

3

.

See, e.g., In re Microsoft Corp. Antitrust Litig., 333 F.3d 517, 520 n.1

(4th Cir. 2003)

(“‘Tipping’ refers to a c

hanging market share based on the

economic theory of a ‘feedback effect,’ which holds that the

attractiveness of a product to consumers increases with the number of

persons using it.”);

Microsoft

, 253 F.3d at 49 (in network industries,

“[o]nce a product or standard achieves wide acceptance, it becomes more

or less entrenched”); Michael L. Katz & Carl Shapiro,

Systems

Competition and Network Effects,

8

J.

E

CON

. P

ERSP

. 93, 105 (1994)

(“Because of the strong positive-feedback elements, systems markets are

especially prone to ‘tipping,’ which is the tendency of one system to pull

away from its rivals in popularity once it has gained an initial edge.”).

4

.

To the extent the challenged conduct involves tying or exclusive

contracts, it may als

o be challenged under § 1 of the Sherman Act.

5

.

See

United States v. Grinnell Cor p., 384 U.S. 563 (1966)

;

see also

Verizon Commc’ns v. Law Offices of Curtis V. Trinko, 540 U.S. 398,

407 (2004)

.