This report examines the impact that formal standard setting organizations (SSOs) play in determining the value of standards and patents. In reality, most patents are worth very little as the new technology they protect is often only an incremental improvement over existing technologies. The value of a new technology, product, or product characteristic can be approximated by the value to consumers of its advantage over the next best alternative. SSOs can reduce the number of close substitutes to a new technology by designating one technology as the standard and rendering all others automatically inferior. Before determining which technology will be chosen as the standard, SSOs typically require their members to disclose any relevant patents they hold and license any proprietary technology to other SSO members either free or for a “reasonable” fee. The authors explore the impact of these patent policies on market power and urge decision-makers to consider the specifics of individual technology markets and industries when determining policy.

NERA Senior Vice President Dr. Lauren Stiroh and Special Consultant Dr. Richard Rapp participated as panelists discussing issues from this paper at the US Department of Justice and the Federal Trade Commission's joint hearings on “Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy” in Washington, DC, Thursday, 18 April 2002.