Jay Pil Choi at this Weekend’s International Industrial Organization Conference

By TAP Staff Blogger

Posted on April 11, 2014

This weekend economists from around the world will gather in Chicago, Illinois for the 12th Annual International Industrial Organization Conference. Hosted by the Northwestern Law Searle Center on Law Regulation and Economic Growth, the conference will cover topics ranging from market structure, mergers and acquisition, and antitrust to patent behavior, platform theory, network neutrality regulation, and the economic impacts of innovation.

Michigan State University economist Jay Pil Choi will be participating as a presenter, discussant, and author at this renowned economics conference.

The three papers by Professor Choi that will be presented explore:

  • The effects of patent pools with complementary patents on incentives to develop subsequent innovations.
  • How net neutrality regulations affect high-bandwidth content provider's investment incentives in quality of services.
  • The role of partial equity ownership to mitigate a buyer’s reluctance to share knowledge with their upstream supplier.

Patent Pools, Litigation and Innovation
By Jay Pil Choi and Heiko Gerlach

This paper analyzes the effects of patent pools with complementary patents on incentives to develop subsequent innovations. We find that the effects of patent pools depend on the strength of patents included in the pool. If patents are relatively strong, then the conventional result holds that pools with complementary patents mitigate the double marginalization problem and reduce overall licensing fees, which promotes subsequent innovations.

However, if patents are relatively weak, patent pools can be used as a mechanism to deter litigation that would invalidate the patents in the pool. Package licensing of complementary patents imposes an all-or-nothing proposition in litigation on downstream firms. This allows patent pools to safe-harbour weak patents which would be targeted in litigation if the licenses would be sold independently. Our analysis shows that if patents are sufficiently weak, patent pools reduce social welfare as they raise total licensing fees and hinder subsequent innovations.

We further explore the policy implications of mandated individual licenses to make the pool patents more vulnerable to litigation and command lower limit license fees. We find that the welfare effects of such policy mandates crucially depend on the size of the litigation cost relative to the value of the innovation. Hence, overall, our analysis suggests that a blanket approval of patent pools based on the complementary nature of the included patents is not warranted and a more cautious approach that takes into account the strength of patents and incentives to litigate is called for.

Asymmetric Neutrality Regulation and Innovation at the Edges: Fixed vs. Mobile Networks
By Jay Pil Choi, Doh-Shin Jeon, and Byung-Cheol Kim

In recent years, there has been an explosive growth in the mobile traffic. According to a report by Cisco, the global mobile data traffic grew 70 percent in 2012 alone, with mobile video traffic accounting for 51 percent of the total mobile traffic. These statistics imply that mobile operators have emerged as primary network access providers for many users and a large portion of their usage involves high-bandwidth video content.

This paper looks at how net neutrality regulations affect high-bandwidth content provider's investment incentives in quality of services. We find the effects crucially depend on network capacity levels. With a limited network capacity, the prioritized delivery services are complements to content providers' investments and can facilitate the entry of high-bandwidth content. By contrast, if the network capacity is large enough, the prioritized delivery and quality of services investment are substitutes. The social welfare effects of the prioritized service is ambiguous in either case.

In the limited capacity case, the beneficial effects of entry by high-band width content should be weighed against the cost of increasing congestion for other existing content. In the high capacity case, the negative impact of reduced investment incentives can be counterbalanced by the benefit of improved traffic management. Our findings have important implications for the contrasting neutrality regulations across the Atlantic: the United States Federal Communications Commission treats mobile networks more leniently than fixed networks while the European Union treats them equally.

Vertical Learning Alliances and Partial Equity Ownership in the Presence of Performance Spillovers
By Jay Pil Choi, Arghya Ghosh, Shuai Niu, and Hodaka Morita

Transfer and spillovers of knowledge across firm boundaries are important determinants of firms’ productivity in the knowledge economy. Downstream manufacturers often educate their upstream suppliers on the principles of advanced production systems, where suppliers can apply the acquired knowledge to serve other manufacturers. This is known as performance spillovers.

Performance spillovers can reduce a buyer’s incentives to educate its partner supplier because, if a buyer’s investment in educating its partner supplier increases the supplier’s productivity to serve other buyers, the buyer’s investment ends up increasing the supplier’s outside option. This leads to the buyer’s under-investment in its efforts to educate the supplier.

The objective of this paper is to study the role of partial equity ownership (PEO) arrangement in mitigating the buyer’s under-investment in vertical learning alliances. We show that the buyer’s PEO in its partner supplier mitigates the under-investment problem because it internalizes a part of the price that the buyer pays to the supplier.

Jay Pil Choi is University Distinguished Professor at Michigan State University and Scientia Professor at the University of New South Wales. His areas of expertise include intellectual property rights, economics of network effects, and antitrust economics. He currently serves as co-editor for the International Journal of Industrial Organization, and is on the editorial board of the Information Economics and Policy, International Telecommunications Policy Review, and Journal of the Korean Econometric Society.