The Ex Ante Auction Model for the Control of Market Power in Standard Setting Organizations

RAND commitments—i.e., promises to license on reasonable and non-discriminatory terms— play a key role in standard setting processes. However, 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 have suggested that “the concept of a ‘reasonable’ royalty for purposes of RAND licensing must be defined and implemented by reference to ex ante competition.” In their opinion, a royalty should be deemed “reasonable” 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 terms. In this paper we investigate whether the ex ante auction approach proposed by Swanson and Baumol is likely to deliver efficient outcomes, both from static and dynamic standpoints. We find that given the peculiar characteristics of some of the industries where standardization takes place, in particular the many different business models adopted by innovating companies in those industries, the ex ante auction approach proposed by Swanson and Baumol may not always deliver the right outcomes from a social welfare viewpoint.