Competition versus IPR Monopoly: Is monopoly good?
This article titled ‘Competition versus IPR Monopoly: Is monopoly good?’ is written by Aishwarya Gupta and reflects on the question of monopoly and competition in the field of IPR. I. Introduction – Competition versus IPR Monopoly: Is monopoly good? The dynamic development in the economy has led to the shift in the market which is quite evident with the… Read More »
This article titled ‘Competition versus IPR Monopoly: Is monopoly good?’ is written by Aishwarya Gupta and reflects on the question of monopoly and competition in the field of IPR.
I. Introduction – Competition versus IPR Monopoly: Is monopoly good?
The dynamic development in the economy has led to the shift in the market which is quite evident with the drastic technological boom. This development has witnessed the rise in some giant market forces, making people wonder if they are being driven to solidity or abyss. Authorities have been established to regulate and monitor the practices of such conquerors. Thus, leading to the establishment of the Competition Commission of India (CCI) under the Competition Act, 2002[i].
The Act’s main objective is to prevent the practices from having adverse appreciable effects on the competition of the country. It followed the roadmap laid down by the three major anti-trust laws of the United States: the Sherman Act of 1890 (to outlaw monopolistic practices); the Clayton Act of 1914 (to prohibit anticompetitive mergers and predatory pricing) and the Federal Trade Commission Act of 1914 (to establish a regulatory commission).
However, after decades of passing such laws, the question that arises is that are these laws still relevant in the present time?
II. Competition and IPR
The shifting paradigm of the market towards technology has given rise to an intangible economy. Jonathan Haskel and Stian Westlake, in their book Capitalism without Capital, have discussed the increasing investment in intangible assets, like design, branding, R&D, and software, as against investment in tangible assets, like machinery, buildings, and computers. In such an environment, the intellectual property rules can make or break the economic model of a country.
Here’s when the conflict between the two worlds arises, on one side stands innovation where people with creative ideas make things and want to protect such creations, and on the other side stands public good where such creations if relinquished can benefit many. For instance, during the noble coronavirus pandemic, the world has been brought to its knees, but the IPR law helped the pharmaceutical sectors to make lucrative profits. Sooner after scrutiny, they were asked to surrender some rights for the sake of public policy.
It can be deciphered that there is an apparent tension between IPR and competition laws. This is due to a very significant reason that IPR gives market power but competition law ensures that such market power is exercised within limits[ii].
III. Monopoly market dilemma
Intellectual property is claimed to be a legal monopoly as it provides Exclusive Market Rights (EMR) to the holder of such property. These exclusive rights create a legal barrier that prevents the other firms to produce the same product. Monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no other firm can enter without facing a cost disadvantage[iii].
Despite that, to ensure equality and fair trade such exclusive rights are restricted with the legislative and statutory actions. The 2005 Amendment in the Indian Patents Act, 1970[iv] introduced the concept of compulsory licensing where public good was placed on a higher pedestal than huge profit gains. Such an act is practiced to create limitations on the exercise of the rights of intellectual property and for the continuance of competition in the market.
1. Why competition is so important?
Persistent generation of ideas and rapid innovation makes way towards economic growth and development. This can further be understood by Schumpeter’s theory of “creative destruction”[v]. He believed with the consistent practice of innovating manufacturing processes one can increase productivity as well as revolutionize the economic structure of any country.
However, the problem with this argument is that once an innovation turns out to be a success the enterprise changes its focus towards profit maximization, which is indeed a good thing but the issue is it uses such huge income to curb the competition in the market, leading us back to where we started i.e. market monopoly.
2. To solve the problem of monopoly, why don’t we abolish intellectual property laws and waive all the inventions in the public domain?
Intellectual property such as patents and copyrights are the deliberate creation of the scarcity of products; they are the consequence of the appropriation of resources. The ultimate aim of the intellectual property law is to pay better to those who are inventors of such creation and make hope for more inventions as a consequence for those who are not inventors.
Jeremy Bentham in his book Rationale of Reward says “With respect to a great number of inventions in the arts, an exclusive privilege is absolutely necessary in order that what is sown may be reaped… He who has no hope that he shall reap will not take the trouble to sow.”
A more favourable argument was made by John Bates Clark in the Essentials of Economic theory that without the patent system there would be very little inventing, and very little adoption of inventions by producers, at all. But in the absence of such monopolistic reward will there be an offset of innovations or the inventors will be driven by self-interest? It has been observed by Professors Taussig and Pigou, that the number of inventive activities remains unaffected even after sustaining the offer of intellectual property monopolies.
IV. Perfect competition v. Monopoly
When every enterprise in the market is the same and sells the same kind of product. Where there is equilibrium and the seller meets the demand of consumers. Such a market is called the perfect competition. It is the opposite of monopoly where the enterprise owns its market share, but in perfect competition, the enterprise sells the product at a fixed market price. With this angle the monopolistic market looks not-so-bad, but can it be good in today’s scenario? In perfect competition, the enterprise mainly focuses on the present-day margin and does not plan the future, whereas, in monopoly, the enterprise can afford to think about the future aspects other than money-making.
The above-presented argument is from the point of view of the enterprise, so what about the benefit of consumers? In an ideal market, one manufacturer captures the market with its innovative product and ultimately hikes up the prices which are born by the consumers. But in the dynamic market where we live in, inventions take place every day, some big, some small, some refining the quality of existing product and some solving a different problem with a new innovative product, and here’s when creative monopolies come to the picture.
Creative Monopolies are those which give customers more choices in products and also better quality. This can be understood by taking a look at some companies that capture a large market share and are also adding value with erratic innovative products. Apple, in 2018, filed for a total of 1,310 patents families, Microsoft filed a total of 1,969 patent families in 2018, and in the year 2020, Alphabet, the parent company of Google Inc. was granted a total of 2379 patents by the U.S. Patent and Trademark Office[vi].
These statistics make us question if monopoly is a bad thing? How much of the present market is truly competitive? Peter Thiel, a venture capitalist and co-founder of PayPal argues that Monopoly is a good thing for society, in an article titled “Competition is for Losers”.
It states that:
“Why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what’s easy to model, not because it represents the best of business… In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won’t matter to the world; some other undifferentiated competitor will always be ready to take your place. Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business[vii].”
V. Monopsony v. Monopoly
The concepts of Monopsony and Monopoly are opposite to each other although may look alike when consumers observe the market. In a monopoly, a single seller controls or dominates the supply whereas in a monopsony, a single buyer controls or dominates demand who is the sole purchaser of the goods or services.
In real life, we can take an example of supermarket-retailer such as Walmart and in the field of e-commerce, Amazon. If we observe closely monopsonist market is the one disrupting the competition in the economy. Determining a purchase price, deliberately driving the prices down, charging high prices, deterring new entrants, purchasing small innovative businesses, etc. are the list of practices that can occur both in a monopoly as well as a monopsony market.
Tech giants like Apple and Facebook come under the category of both monopsonist and monopolist entities. The outcome of the monopsonist market can be understood by the 2014 legal battle between Hachette and Amazon. Hachette is a publisher whose books were refused to be published on Kindle- by far the biggest e-book platform. The reason for such halt was Amazon’s pertinacious conduct to set the prices according to their wish. It also issued a statement to its customers to buy the books of the said publisher from elsewhere.
Here we can notice Amazon excising its monopsony power. It had the power to regulate the supply of Hachette books[viii]. Such abuse of dominance makes legislators pass stricter laws for the introduction and regulation of competition in the market.
In recent years in India, CCI issued notices to many companies including Google, Amazon, and Flipkart for violation of regulations under the Competition Act[ix]. So maybe we are living in a monopolistic market where big businesses do not have serious competition. But is competition the solution of monopoly? Or should it be, is monopoly a problem? Whether competition is really necessary or will it slow down the speed of innovative growth and development of the economy?
As we discussed above, that even though these big companies have a large market share, the data from past decades does not show any evidence of a technically stagnant economy.
If we take a look at the classic example of IBM, a computer hardware company, which at one time had colossal market share failed to compete with the new breed of innovative software companies and hardware producers who could make computers at much cheaper rates[x]. Thus, our history has witnessed many such events of creative destruction as well as a creative monopoly.
VI. Intellectual Property: a way towards economic development
Intellectual property is the most effective way to invest, invent and develop product knowledge. It helps to economically value the creation of an innovative product or process. Recently, foreseeable worldwide dominance of such inventions is making legislators panic and slow down the growth of intellectual property laws. Some critics argue that IP laws raise the economic divide and should permanently be dismantled.
In a study by Peter Moser and Heidi Williams, it was found that the patent system discourages innovation as it drives up the cost of new technology and invites lobbying. So maybe there is a need to bring into action such a system that boosts the creation and dissemination of ideas, where innovation can be democratized with rational public policy.
We need to re-examine the system which can start by improving institutional processes where the regulatory body does not favour the inventors excessively. Another reform can be the reduction of the term of holding the exclusive rights. Further, provisions with stricter criteria for the issue of rights to truly meaningful inventions can be introduced. Hence, we don’t need to apply stricter competition laws, what we need is liberal as well as futuristic intellectual property laws.
In conclusion, we need to reevaluate our present mindset towards the idealistic competitive market and push the pedal towards economic growth with dynamic laws related to intangible property.
[i] The Competition Act, 2002, No. 12, Acts of Parliament, 2002 (India).
[iv] The Patents Act, 1970, No. 39, Acts of Parliament, 1970 (India).
[v] Joseph Alois Schumpeter, Capitalism, Socialism and Democracy 82-83 (Routledge, 1976).
[viii] United States of America, Plaintiff, v. Apple, Inc., Hachette Book Group, Inc., Harpercollins Publishers L.L.C., Verlagsgruppe Georg Von Holtzbrinck GMBH, Holtzbrinck Publishers, LLC D/B/A Macmillan, The Penguin Group, A Division of Pearson PLC, Penguin Group (USA), Inc., and Simon & Schuster, Inc., (2012) 77 FR 24518