Profiting from Technological Innovation
Dynamic Capabilities and Strategic Management
Antitrust and Innovation
Key Research Topic:
Profiting from Technological Innovation
Citation and Abstract
Profiting from Innovation: Introduction and Discussion
Research Policy web page for original article
Research Policy 20th anniversary special issue of the publication of “Profiting from Innovation”
Research Policy conference agenda, Berkeley CA, September 21, 2006
Citation and Abstract
“Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy,” by David J. Teece, Research Policy , Volume 15, Issue 6, December 1986, Pages 285-305
This paper attempts to explain why innovating firms often fail to obtain significant economic returns from an innovation, while customers, imitators and other industry participants benefit Business strategy — particularly as it relates to the firm’s decision to integrate and collaborate — is shown to be an important factor. The paper demonstrates that when imitation is easy, markets don’t work well, and the profits from innovation may accrue to the owners of certain complementary assets, rather than to the developers of the intellectual property. This speaks to the need, in certain cases, for the innovating firm to establish a prior position in these complementary assets. The paper also indicates that innovators with new products and processes which provide value to consumers may sometimes be so ill positioned in the market that they necessarily will fail. The analysis provides a theoretical foundation for the proposition that manufacturing often matters, particularly to innovating nations. Innovating firms without the requisite manufacturing and related capacities may die, even though they are the best at innovation. Implications for trade policy and domestic economic policy are examined.
Introduction to Profiting from Technological Innovation
Published in 1986, Profiting from technological innovation, (Research Policy, Volume 15, Issue 6, December 1986) is the most cited paper ever published in Research Policy with over 800 citations as of July 2007, and was selected by the editors as one of the best papers published by Research Policy over the period 1971-1991. In October 2006, Research Policy published a special issue, Volume 35, Issue 8, commemorating the 20th Anniversary of David Teece’s article. This is the single most cited paper ever published by Research Policy, with 740 cites as of May 2007.
A conference sponsored by Research Policy was held at the Haas School of Business on September 21, 2006, in which the special issue papers were presented, as well as special guest lectures, including one by Dean of the Haas School Tom Campbell on “Innovation and the Law: The Contributions of David Teece.” Papers and panel topics included Economics and Innovation, Innovation and IP Protection, and extensions to Profiting from Innovation.
Discussion of Profiting from Technological Innovation
Excerpted and adapted from the Introduction to the Research Policy 20th anniversary special issue of the publication of “Profiting from Innovation” by David J. Teece, by editors Henry Chesbrough , Julian Birkinshaw, and Morris Teubal, Research Policy, Volume 35, Issue 8, October 2006, Pages 1091-1099.
David Teece’s research has made lasting contributions to the study of innovation by treating the management of innovation within far more realistic conceptions of the firm than those that have prevailed in more traditional economics theories. Instead of viewing the firm as a production function, or simply as a black box (to use Nathan Rosenberg’s term), Teece has studied the innovation process in firms where rationality is bounded, history matters, change is costly, and firm endowments are heterogeneous…
Profiting From Technology Innovation, (Research Policy, Volume 15, Issue 6, December 1986) is the single most cited paper ever published by Research Policy, with 740 cites as of May 2007. And, befitting this impressive citation count, the importance of the paper extends beyond technology and innovation management to broader topics of business strategy, science and technology policy, and the theory of the firm, just to identify some of the most salient areas of its influence. With the publication of this article, Teece left forever the relatively narrow confines of economic analyses of innovation, and forged a much broader, multidisciplinary approach to the study of innovation. For in this single article, he combines economics with organizations, technologies, intellectual property, and markets (or the lack thereof) for complementary assets. If one reads his earlier work, prior to 1986, and compares it to the research that Teece has performed subsequent to this article, one cannot help but be struck by his shift in scope following this article.
Teece’s article was so influential in large part because it asked – and then answered – a very important question: under what conditions do firms profit from innovation? Why do Alfred Chandler’s “first movers” prevail in the market with certain innovations, while in other situations the “followers” gain the lion’s share of the profits? Teece’s answer transcended traditional economic approaches to the question (which would largely hinge on so-called “first mover” advantages in Porter (1980) that in turn emanated from earlier industrial organization theories of entry barriers), or game theoretic treatments of sunk investments in two stage games, as in Shapiro (1989) by insisting that aspects of economic organization, business strategy, technology and innovation must all be understood in order to give a satisfactory answer to this question.
Teece’s answer, in his own words, combined these various perspectives. To quote from the abstract for his article (Teece, 1986, p. 285)
“… when imitation is easy, markets don’t work well, and the profits from innovation may accrue to the owners of certain complementary assets, rather than to the developers of the intellectual property. This speaks to the need, in certain cases, for the innovating firm to establish a prior position in these complementary assets […] innovators with new products and processes which provide value to consumers may sometimes be so ill positioned in the market that they necessarily will fail”.
Conclusion
What Teece has taught us is that the limits of what markets can coordinate are at the heart of what a firm must organize in order to profit from innovation. The boundary of what activities should be organized within the firm, and what activities may be coordinated through the market will shift over time. Innovations will continue to emerge, and the choices firms make in how to appropriate value from them will also vary over time. But there will always be a boundary between the firm and its markets. It is the firms who negotiate that boundary, take the risks, make the investments, access the requisite specific complementary assets, and manage them effectively, who will be positioned to profit from their innovative activities.
Key Research Topic:
Dynamic Capabilities and Strategic Management
This section has information on research stemming from publication of the article of this name in Strategic Management Journal in 1997 and a subsequent article, “Explicating Dynamic Capabilities: the Nature and Microfoundations of (Sustainable) Enterprise Performance,” recently published in Strategic Management Journal. The original article was noted by ScienceWatch as the most highly cited article in Business and Economics in the period 1995-2005.
Citation and Abstract for original (1997) article
Strategic Management Journal page for original (1997) article
Citation and Abstract for subsequent (2007) article
Strategic Management Journal page for subsequent (2007) article
Diagram showing Dynamic Capabilities framework
Citation and Abstract for original (1997) article
Dynamic Capabilities and Strategic Management, by David J. Teece, Gary Pisano, and Amy Shuen, Strategic Management Journal, Vol. 18, No. 7 (August, 1997), pp. 509-533.
The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm’s (specific) asset positions (such as the firm’s portfolio of difficult-to-trade knowledge assets and complementary assets), and the evolution path(s) it has adopted or inherited. The importance of path dependencies is amplified where conditions of increasing returns exist. Whether and how a firm’s competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding internally) and imitatability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing internal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival’s costs, and excludes new entrants.
Citation and Abstract for subsequent (2007) article
“Explicating Dynamic Capabilities: the Nature and Microfoundations of (sustainable) Enterprise Performance“, Strategic Management Journal, 28:13 (December 2007), 1319-1350.
This paper draws on the social and behavioral sciences in an endeavor to specify the nature and microfoundations of the capabilities necessary to sustain superior enterprise performance in an open economy with rapid innovation and globally dispersed sources of invention, innovation, and manufacturing capability. Dynamic capabilities enable business enterprises to create, deploy, and protect the intangible assets that support superior long- run business performance. The microfoundations of dynamic capabilities – the distinct skills, processes, procedures, organizational structures, decision rules, and disciplines – which undergird enterprise-level sensing, seizing, and reconfiguring capacities are difficult to develop and deploy. Enterprises with strong dynamic capabilities are intensely entrepreneurial. They not only adapt to business ecosystems, but also shape them through innovation and through collaboration with other enterprises, entities, and institutions. The framework advanced can help scholars understand the foundations of long-run enterprise success while helping managers delineate relevant strategic considerations and the priorities they must adopt to enhance enterprise performance and escape the zero profit tendency associated with operating in markets open to global competition.
Key Research Topic:
Antitrust and Innovation
Presentation Transcript
“Innovation and the Law: The Contributions of David Teece”
Tom Campbell, Dean of the Haas School of Business
Research Policy Conference: 20th Anniversary of the Publication of Profiting from Technological Innovation
Haas School of Business, University of California, Berkeley
September 21, 2006
Introduction
I never had a more enjoyable task than to review and comment upon the contribution of David Teece. My background is both economics and law. I was, for many years, a professor of law and then I recently became a professor of business. I also wish to disclose that it has been my privilege to be a colleague of David Teece in LECG twice in my career. I am not presently affiliated with LECG, to avoid any issues of conflict.
My subject is that David’s seminal article on appropriability of intellectual property [Profiting from Technological Innovation] sits in a larger context of David’s work on dynamic market analysis. David’s work has influenced very important court decisions. Just recently, he was a very important expert witness on behalf of Oracle when the government attempted to stop Oracle from acquiring PeopleSoft; and he was an expert witness in the Rambus case. David’s opinion in Rambus was cited quite favorably by the administrative law judge. Then the administrative law judge was reversed by the Trade Commission, but the Commission was reversed by the Federal Circuit, so it is fair to say that David’s point was vindicated. And this has been so even in cases where he did not testify; unlike many who have spent their years working as law professors, David’s articles have actually been cited by the United States Supreme Court. So congratulations on having achieved what is the equivalent of the highest form of recognition in our legal profession.
Turning now to the specifics of the application of appropriability of intellectual property and a dynamic market context, I have nine illustrations. The first is tying, the second is price discrimination, third is standard setting, fourth is the need to be humble if you are an antitrust administrator – the word hubris appears in David’s writings. Number 5 is the market’s definition, which is pervasive in antitrust, 6th is the different ways of expressing market power, 7th is the market for innovation as opposed to the market for any given product, 8th is the definition of monopoly or monopoly pricing, in such a way to include adequate incentives for innovation, and 9th is that quality competition is improperly captured in the merger guidelines.
1. Tying
Let’s begin then with tying – obviously in the antitrust regime the concept that one product be tied to the sale of another or that one service be tied to the sale of another service or product has been long understood by economists as a potentially metering device in order to allow somebody with Schumpeterian or Ricardian rent possibility to extract a higher amount of it in return for the investment in the innovation. Antitrust law has lagged behind that economic context, however, condemning tying upon the presence of market power in the tying product causing any significant effect in the market for the tied-in product. This is wrong economically and David has said so consistently. The appropriability of intellectual property, as well as the proper utilization of the innovation itself, sometimes requires tying. Obviously if you are the manufacturer of a copying machine you would want to make sure that the correct toner is used because the user will blame the machine not the toner manufacturer. So also if you have invested properly in the intellectual property of the machine it may be that by selling toner you can charge a higher price to those whose utilization is greater. David’s view has now been almost adopted by the Supreme Court in the Jefferson Parish case applying a standard for tying so difficult to meet that it will likely not stop beneficial tying that produces IP through proper appropriability.
2. Price Discrimination
The second issue is price discrimination and I have the same argument, largely: that a practice of price discrimination ought not to be condemned per se. The Robinson Patent Act demands an effect on competition to condemn discrimination if it is purely price discrimination. But if it is a form of discrimination expressed in services or promotional advances then the Robinson Patent Act is per se. This also, David has criticized as inappropriate to do and has been rewarded by the virtual demise of the Robinson Patent Act so that neither the Justice Dept. nor Federal Trade Commission has brought [a case under] the Robinson Patent Act in over 20 years.
3. Standard Setting
The third issue is standard-setting where David’s view was expressed most clearly in his expert testimony in the Rambus case adopted by the administrative law judge. On this subject, David has written a substantial article in the Minnesota Law Review [“Standards Setting and Antitrust” (with Edward F. Sherry), MLR, 87:6 (June 2003), 1913-1994]. [full text for subscribers to Hein Online] which shows in a way I have not seen before that there is an inherent bias in standard-setting organizations against intellectual property and against the adoption of a standard that would embrace patented technology.
That is for the following three reasons, which David makes very clear in this Minnesota Law Review article, “the roles of standard-setting organizations are likely to favor users rather than owners of IP because the former outnumber the latter so if it’s a one-participant one-vote rule the users will always favor making part of the standard that which would require a royalty. Second, standard-setting organization participants tend to be engineers with an engineer’s bias against patents.” You have to forgive David for his gift for generalization. I would like to test that proposition at the College of Engineering. Third, royalties are treated as a private cost by manufacturers and end-users despite the fact that from a societal standpoint they are best seen as a transfer payment rather than a social cost. That observation should lead us to be very hesitant to condemn the failure to disclose the existence of IP by a participant in a standard-setting organization. David argues instead that it is reasonable to expect every other participant in the standard-setting organization to know that the other participants might have intellectual property and that the purpose of the standard-setting organization is to adopt the best technology. Thus, the almost per se application, which was the FTC’s test for failure to disclose, is unnecessary and could conceivably be harmful by reinforcing this bias of standard-setting organizations against IP. I thought that was quite insightful.
4. Need for Humility in Antitrust
The fourth insight from David’s work is the need for humility in antitrust. I’d like to quote from another article – this one David did in the antitrust bulletin: “To our dismay, the agency viewpoint … is that the importance of innovation requires intervention on the part of agencies. The importance of innovation demands additional vigilance and intervention on the part of agencies – such hubris displays a lack of appreciation for the complexity of the issues and optimism completely unsupported by the historical record with respect to what regulators can accomplish with respect to improving outcomes in regimes of rapid technological change. “
I will return to this at the end of my remarks but it puts David squarely in the George Stigler – Bill Baxter School of ‘For Gosh Sakes, just stand there – Don’t do something.’
5. Failure to Consider Dynamics in Antitrust
Fifth: The failure to consider dynamics in antitrust is very apt as David has observed in many places. I will give you a couple of quotes in just a second, but Antitrust has long proceeded with a static mantra: structure, conduct, performance. Antitrust says, “Let’s understand this industry by describing a single product and a single geographical space that it inhabits, and, with the exception of just a few peripheral considerations such as maybe this product is in the process of becoming a different one, let’s stop there.” Particularly, this is so in the Merger Guidelines where David notes the measure of a product definition is whether a hypothetical non-trivial non-transient increase in price would be able to effectuate a profitable strategy in a one-year period. This is a laughable proposition for any industry which changes over time, quite apart from that arbitrary one-year test. The quotation I wish to give for David’s criticism of this in antitrust is as follows: “It is of some interest to break the sources of rent down more finely” – he goes through Ricardian and Schumpeterian –“both are benign sources of rent from an antitrust perspective. From a public policy perspective, they are beneficial… We believe these distinctions are fundamental and yet to our knowledge, there is no literature on antitrust economics that recognizes them. This is because of the static nature of mainstream antitrust analysis and its gross neglect of innovation.” I saw this in listening to and reading David’s testimony in the Oracle case where he argued that the government’s product market definition was narrow and static in an industry such as high-end application software. Here is the second citation I will give to David for making this point “Simply analyzing the market from a static perspective will almost always give the identification of markets which is too narrow because market power is often quite transitory – static entry barrier analysis with its one to two-year fuse for entry will often find that an innovator has power over price when its position is in fact, extremely fragile.” That’s a very valuable insight and directly counter to traditional antitrust enforcement. I have a criticism at the end of David’s point of view that we must not neglect the fact that consumers could be harmed in the short run, and there is a danger in pushing David’s perspective too far since he might ignore the short term, but he is certainly quite right that it is absurd to conclude monopoly power exists because of the potential of rents in a one or two year period. The absurdity of market definition is shown in another area where this failure to recognize dynamic as opposed to static market phenomenon shows itself in antitrust. David tells us that “An economist at the U/Washington once claimed that Chevron had a monopoly in the sale of Chevron gasoline”. Truer words were never spoken – it’s that kind of thing that happens in Antitrust. I suppose there are all sorts of consequences that would flow from having such monopoly powers. If Antitrust does not recognize dynamism and innovation, and to a large extent David’s criticism is that it does not, then Antitrust itself is condemned to being irrelevant, at best, to innovation – being harmful at worst – harmful by stopping useful practices including mergers or in some cases bundling the product.
6. Different Ways of Expressing Market Power
6th point: The failure to consider that monopoly does not exercise power simply by restricting supply and increasing price – that the real danger in monopoly, is that it deadens innovation, has been virtually unrecognized in the courts. There is an occasional statement most famously by Learned Hand that the reward for monopoly is an easy life or the lazy monopoly theory which has been utterly refuted by capital markets theory but is also the rare recognition of any aspect of harm from a monopoly from the point of view of innovation. As I have studied more and more industries in my own work in the antitrust economics area I’m convinced that the model lifting price and restricting output is quite the exception, and to the extent that there is market power, it is generally exercised in protecting oneself against the innovations of others rather than by restricting output which would only invite entry.
7. Market for Innovation as Opposed to the Market for Any Given Product
7th point: The market for innovation rather than the market for any particular service should, if the government were doing its job, be an appropriate focus for antitrust, David says that ”the competitive landscape is so different in high technology industries that the traditional hallmarks of monopoly rarely apply. This is either because monopoly power is so difficult to acquire in high tech industries or the traditional hallmarks of monopoly are no longer operational because the benchmarks are not observable. “
8. Definition of Monopoly or Monopoly Pricing
My Eighth point: Antitrust analysis of monopoly pricing has followed the lead of Areeda-Turner [Areeda, P. and Turner, D.F., (1975): Predatory Pricing and Related Issues Under Section 2 of the Sherman Act, Harvard Law Review, 88: 697-733] [full-text for JSTOR subscribers] in their very famous article in the Harvard Law Review, suggesting that predatory pricing be defined as pricing below average variable cost. It does not include an appropriate rate of return to creative innovation adequate to real conditions of competition. That fact should be included in any definition. I quote from David “Perhaps a more meaningful approach to monopoly pricing is to ask whether consumers are paying a price higher than is needed to draw forth the products and services they desire over time. The price therefore cannot be analyzed statically; it must be viewed dynamically and across products.” This has symmetry and applicability to both low and high pricing. If a firm is pricing a product below a price that would be adequate to obtain adequate innovation in a dynamic model, then, although probably contrary to David’s intent, it ought to lead to potential antitrust liability. Conversely, high profit should not itself suggest antitrust liability. The Federal Trade Commission, during the time I was there, was just unwrapping the industry survey work which was done in the Chairman Pertschuk administration, wherein high profit was perceived as an invitation to investigate. If the FTC saw high profits in an industry, it would go after it without taking account at all of the necessity for putting aside profit for innovation.
In the definition of anticompetitive conduct, David has the following three points as to what he would consider properly anticompetitive. I wonder after hearing them whether you would agree with me that David only needs one of them. He says “from an economic perspective conduct must satisfy these three criteria to be anticompetitive:
- Conduct must not be the sort that society means to encourage such as non-predatory price reductions
- That the conduct must be socially inefficient. In the sense that it tends to inhibit industry innovation or otherwise create distortions inconsistent with long run consumer and human welfare”. That is the only one, I think that he needs. That is both sufficient and necessary to the first, namely the conduct is not of the sort that society seeks to encourage. If it is socially inefficient, that is almost definitional.
- Third, “that the conduct must be substantially related to the maintenance or acquisition of monopoly power,” and ought to be a substantial cause of the monopoly power under scrutiny. I would not agree, except insofar as this condition is correlated with Point two.
Innovation can lead to monopoly power, and be socially desirable. I might be wrong on that minor criticism; what’s fascinating, however is the centrality of innovation in the definition of what is to be condemned under the antitrust laws.
9. Quality Competition is Improperly Captured in the Merger Guidelines
My last antitrust point deals with the application of the small but significant and non-transitory increase in price as set forth in the guidelines. David gives us a new concept – the ‘snip’ test – a small but significant increase in price – “There is a snip where competition is performance based [and this] is likely to create a downward bias in the size of the relevant product market and a corresponding upward bias in the ascent of market power” That is absolutely right where performance is the relevant criterion. The snip is a one time snapshot and in that sense quite misleading.
This leads to a question overall then at least from my perspective on antitrust of what are the Teecian qualities of analysis. The first overwhelming effect of the Teecian formula is respect for innovation, obviously to all of us here, but he puts it probably most clearly in the following from his Antitrust Journal article, “Innovation is the most powerful force animating competition. Throttle innovation and one throttles the most fundamental factor driving competition and insuring superior products and competitive prices for the consumer.” Sidney Winter, participant at our Conference, has titled innovation in an article ‘Schumpeterian, Arrowian and Teecian’ so that is pretty good company, Schumpeter, Arrow and Teece. I’m going to do him one better – it’s Einsteinian. Here’s what I mean by that. I want to suggest to you that there is something simply Einsteinian in recognizing not just the static but the dynamic. Einstein states that time and space are malleable. You can travel very fast through space and thereby slow down time. We all of us right now are moving through time. But if you go through space at the speed of light, you no longer travel through time. You travel only through space. Bertrand Russell was asked why it is that nothing can travel faster than the speed of light. The answer is that nothing can travel slower than the speed of light. We are just traveling through space-time, and it’s malleable between space and time. That is a fundamental insight and apologies to everyone in the room who, no doubt, has better knowledge of Physics than I, but it has Teecian characteristics. You can measure a product and a geographic area and say that is a market, and you will be quite wrong. You might be able to measure a snapshot but if you have not captured in a relatively simple theory kind of way that market power seen at one moment is completely irrelevant to the ability to shape or have an effect on the transition of that market, then you have missed the fabric of innovation much as you would miss the fabric of time and space. So I add to the characterization that David Teece is not only Schumpeterian and Arrowian but actually Einsteinian.
Guidelines, for example take account of innovation in the way I mentioned, only at the margin – one might also analogize it to a step function. Let’s take a look at what happens in one year or two years and find by contrast it is irrelevant if it takes longer than that. It is as wrong as describing that a subatomic particle travels in space with a measurable momentum, and you can measure that at the same time you have identified its location. You cannot. You can do one or the other. So I would end by saying David Teece is also Heisenbergian. I mentioned just a while ago that David shares this with Stigler. Dr. Stigler said he was not sure whether the Antitrust Laws in America had done good or not. He just left that as an open question. David, in his preference for private ordering, follows Stigler. In his preference for private ordering, he also follows Bill Baxter, who wondered if we had to have all the antitrust laws; do we need anything other than Sherman Section 2 which is the most elastic of all the Antitrust Laws – it does not deal with agreements, it does not deal with price discrimination, it simply says: Actions which tend to create a monopoly and thereby diminish competition are suspect – so David is Stiglerian.
Lastly, I think the company is good – David Teece is Easterbrookian. Judge Frank Easterbrook, of the Seventh Circuit, has stated “If any economic institution survives long enough to be studied by scholars and stamped out by the Law it probably should be left alone. And if any economic institution ought to be stamped out, it is apt to vanish by the time the enforcers get there.” It is significant that David quotes this quote of Easterbrook so I am quoting David quoting Frank Easterbrook. Probably this ruins Judge Easterbrook’s chances for being nominated to head the Antitrust Division should he ever wish that particular honor
Another Teecian characteristic is recognition of opportunity cost – the harm of not inventing, the harm of not expanding a business, the harm of not hiring new people is not captured in traditional antitrust analysis at all. It is a very, very conservative doctrine in antitrust which measures only the alleged welfare triangle of loss and in some aspects not even that instead of considering opportunity cost. I can add one point regarding the Food and Drug Administration: It’s distinctly Teecian to ask whether we are wise in having standards for the invention of new therapies under the Food and Drug Administration in our country. Should we require that a product be proved safe and effective? In fact we tend to run those words together but they are very different. It may be the government’s duty to say a product is or is not “safe” because of the potential harm to unsuspecting people who cannot invest in the information effort to find out if a product is unsafe, but” effective” ought to be left to the marketplace and I think that would be a major area of improvement. I wish to conclude with some observations of some dangers of these Teecian characteristics. The first is a bias towards inaction. There is the possibility that consumers will be harmed in the short run waiting for the technological shift. Now clearly I am criticizing not David Teece but a stereotype – a caricature of David Teece. I am criticizing a David Teece who would say “Easterbrook is right all the time.” And that is not who David is. Nevertheless, it is fun to have a colleague I can criticize and caricature. The danger here is Lorraine Journal and Microsoft. In Lorraine, the Supreme Court dealt with the owner of a newspaper who was worried about the new technology of radio and in order to prevent the development of the new technology radio, the owner of the newspaper announced that any advertisers who were also running advertisements on the radio would not be allowed to run advertisements in his newspaper any more. And the Court correctly held that to be monopolization – a violation of Sherman Act, Section 2. Whereas the Teece caricature, not David, an imagined person out there, might say: Why not just wait, radio will take over very soon anyway and then TV and then on-line advertising. But if we waited, the advertisers in the Lorraine Journal obviously would have been hurt. In Microsoft, the government’s theory – I agree with in this instance – admitted that there was competition which would eventually come from software equivalents offered through the Internet. One could take the caricature and say: “If that’s so, why don’t we just wait for that to happen?” It will happen and so the tying arrangements of which Microsoft was convicted are innocuous. And the answer is that both in the Lorraine and in Microsoft, there is a substantial amount of harm which could be effectuated while waiting. The second criticism of the Teecian characteristics in law is that it would disfavor patent pooling.
A preference for private ordering and observing what is at least presumptively efficient should lead David to favor patent pooling and mandatory licensing, which is the unwritten rule in Silicon Valley. It is unwritten law that there will be sharing as opposed to insistence on royalty for patents; and that seems to me an observation with which David will have to come to grips because it would seem, on its face, not to cut in the same direction as maximizing appropriability. Similarly, the logic of David’s position would oppose the required disclosure of patent applications after 18 months; but that, I believe, has proved to be a salubrious improvement in order to prevent the practice of submarine patents which were a depressing fact in the development of innovation.
10. Closing
There are many other implications and I would only expect the future to hold opportunities for David to share them with us as he applies his exceptional insights. Among the areas I would like to see David continue and expand his work would first of all be optimal patents duration. I don’t see that there is any particular logic to the present term and it is a subject that does lend itself to academic research to find some optimal period of time. I’ve not seen David publish in that area and the leader of the theory of appropriability of IP ought to have an opinion on optimal patent duration. Secondly, as I remarked earlier, the Food and Drug Act would benefit from David’s recrafting. Thirdly, how to include in your cost benefit analysis for these statistics that require it, the cost of the foregone, and the opportunity cost. This concept is throughout Regulatory law. For example, we should reconsider the rule that anything which contributes to the Occupational Health and Safety Act (OSHA) increase of harm in the workplace must be prohibited. Such a rule takes completely no account of the opportunity cost of shutting down that industry. The position of the administration of President Jimmy Carter was one filament of cotton dust in the air should shut down a plant. The position of the Reagan administration was “Do a Cost Benefit Analysis”. And it is amazing to me that that was where the debate was, as opposed to where it really should have been: Your Cost Benefit Analysis should include Opportunity Cost.
11. Additional Note
The last contribution of David to the Economics of Law or the application of Economics in Law I want to highlight and give praise to is the Innovative Model that started as the Economics Consulting Group and became LECG, with which I think most of us are familiar. With Tom Jorde, LECG was David’s own innovation. It was unique in harnessing attributes of the Academy in an area which was greatly in need of them, namely the prestige of individual faculty with the nimbleness of a private company. Universities are not frequently called nimble. I can particularly testify to that as a Dean. Private companies are and in creating this new model of consulting which David and Tom Jorde did in creating LECG, they combined the nimbleness of the private company with the independence and prestige and reward structure that we saw by expert witnesses in the Academy. This was a sharp break from the model that the expert witnessing would be done by an employee of a consulting firm who would prepare the case that the client wanted to hear. With that recognition, I wish to join the Celebration today in recognizing our colleague, my colleague, David Teece, who, I will end by saying, is a student of Innovation and also an Innovator in practice himself.
Thank you very much.