The Pros and Cons of Transparency

Transparency in standardization has important advantages. It fosters accountability in decision-making, through external and internal review. It also helps companies, including small and medium enterprises, to make informed decisions.

However, transparency can also have undesirable consequences; leading to collusion, grid-locks and strategic commitments. Regulators should accordingly think twice, and be extremely careful about the details, before mandating or regulating transparency in the standard-setting context.

Decentralized market economies tend to be transparent in very fundamental respects. In relation to consumable products, competing firms rely on dissemination of information through pricing, advertising and other means to maximize demand. With respect to processes, on the other hand, firms typically have incentives to be transparent to reduce transaction costs. Audits, financial reports, public disclosures to capital markets serve to reduce capital costs. Furthermore, external review of internal processes can reduce the cost of arms length contracting and thus facilitate vertical specialization. Transparency is accordingly an equilibrium phenomenon in market economies. It is however key that it is a market response to demand and relies on active choices by customers and users and, therefore, on competition between suppliers.

The same fundamentals are true also for standard-setting; perhaps even more so as long as standardization is market-driven. SSOs have a very basic interest in being transparent about standards they have developed. Success for a standard setting organization is directly related to use and deployment of standards that it develops. The very result of the process is disclosure through publication. Firms that contribute with know-how, including IPRs, do so to maximize the use of its knowledge. It is in the interest of IP-holders to maximize dissemination as long as reasonable compensation is guaranteed and participation is voluntary.

The transparency of standard setting organizations, including informal fora and consortia, varies. As for markets in general, information about the products tend to be disseminated quickly and widely. The largest and most important organizations also tend to be very transparent about processes in order to grow in membership.

The question is then, why is transparency not maximized by markets. And, more importantly, should it be. The key to these questions is that transparency often enhances efficiency; but not always. It is accordingly advisable not to generalize and to be very careful about the details.

Transparent pricing (including IPR licensing terms). While transparent pricing can facilitate choices and improve predictability, it may also facilitate commitment and collusion. Examples are numerous. For instance, experience from US auctions shows that too transparent bidding allows producers to split markets. The Danish government learned several years ago that publishing prices can raise, rather than lower, prices. Airlines used pre-publication of fares to coordinate on higher prices on certain city-pairs. It is accordingly critical to keep scope for secret price cuts, price differentiation and rebates to maintain healthy competition.

Transparent negotiations (including committee work). While transparent negotiations can improve access e.g. for small and medium enterprises, it may also result in gridlocks and negotiation failure. Excessive transparency may reduce the prospects for compromises as participants have to publically commit to certain positions before a decision can be reached. It may also foster undesirable signaling and strategic commitments. One should accordingly recognize the value of strategic flexibility. The benefits of disclosing information from internal processes and discussions can therefore vary across organizations.

Transparent decision-making (including public votes). Disclosure of votes has the advantage that firms have to be public about how they influence a particular decision. However, it also has numerous disadvantages. There are fundamental reasons why most democracies use secret ballots. With secret voting it is impossible to verify, and to reward or punish, a particular voter. There are also fundamental motives for why some courts and governments do not disclose the votes. The idea is that the governing body is a collective. The strength of a decision should not depend on the vote. The outcome should be judged on its merits.

Transparent strategy (including full disclosure of IPR). There are tremendous values at stake as collective decisions are taken. This creates incentives for rent-seeking and manipulation. Transparency can support these interests by fostering truthful behavior. It is accordingly desirable that a holder of an (unknown) patent is prohibited from manipulating a standard in its own interest just to create a lock-in that can subsequently be exploited in IPR licensing by that firm. However, the issue becomes more difficult with respect to passive behavior. Standard development is often done by technical experts from large firms. Requiring that these experts always fully understand and disclose the strategy, interests and IPRs of their employer is neither feasible nor desirable.