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Royalty Stacking In High Tech Industries: Separating Myth From Reality

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Author Info

  • A. Jorge Padilla

    ()

  • Damien Geradin

    ()

  • Anne Layne-Farrar

    ()
    (CEMFI, Centro de Estudios Monetarios y Financieros)

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    Abstract

    A few recent contributions to the literature have claimed that in high-tech industries -- where innovation is often cumulative and products include many components protected by patents held by many different patent holders – the cost of obtaining all necessary licenses is too high. Some have even requested sweeping policy reforms to deal with the so-called royalty stacking problem. In this Essay we find that the empirical evidence – including new evidence for 3G telecom – does not corroborate the gloomy predictions of the proponents of the royalty stacking hypothesis. A careful look at the theoretical underpinnings of this hypothesis explains the lack of empirical support. First, three necessary conditions must be satisfied for a royalty stacking problem to exist: (a) innovation must be cumulative, so that the patents are complementary; (b) there must be many patents for a given product; and (c) the many patents must be held by numerous, distinct rights holders. Buy royalty stacking may not be a problem even if the three necessary conditions are met; i.e., the three conditions are necessary but not sufficient. Moreover, several market mechanisms, such as cross licensing or voluntary patent pools, can be used to mitigate the costs of multiple concurrent patent negotiations. We conclude that the so-called royalty stacking problem is more myth than reality and that there is no reason to adopt the dramatic reforms in antitrust and patent law that have been recently proposed.

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    Bibliographic Info

    Paper provided by CEMFI in its series Working Papers with number wp2007_0701.

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    Date of creation: Jan 2007
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    Handle: RePEc:cmf:wpaper:wp2007_0701

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    References

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    1. Nicholas Bloom & Mark Schankerman & John Van Reenen, 2005. "Identifying Technology Spillovers and Product Market Rivalry," CEP Discussion Papers dp0675, Centre for Economic Performance, LSE.
    2. Jerry R. Green & Suzanne Scotchmer, 1995. "On the Division of Profit in Sequential Innovation," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 20-33, Spring.
    3. Josh Lerner & Jean Tirole, 2002. "Efficient Patent Pools," NBER Working Papers 9175, National Bureau of Economic Research, Inc.
    4. Scherer, F. M. & Harhoff, Dietmar, 2000. "Technology policy for a world of skew-distributed outcomes," Research Policy, Elsevier, vol. 29(4-5), pages 559-566, April.
    5. Hall, Bronwyn H & Ziedonis, Rosemarie Ham, 2001. "The Patent Paradox Revisited: An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 101-28, Spring.
    6. Shapiro, Carl, 2006. "Injunctions, Hold-Up, and Patent Royalties," Competition Policy Center, Working Paper Series qt6px3m1rb, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    7. Paul A. David, 2005. "The Economic Logic of “Open Science” and the Balance between Private Property Rights and the Public Domain in Scientific Data and," Development and Comp Systems 0502006, EconWPA.
    8. Iain M. Cockburn & Megan J. MacGarvie, 2011. "Entry and Patenting in the Software Industry," Management Science, INFORMS, vol. 57(5), pages 915-933, May.
    9. Suzanne Scotchmer, 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 29-41, Winter.
    10. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    11. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    12. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
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    Cited by:
    1. Mueller, Elisabeth & Cockburn, Iain M. & MacGarvie, Megan, 2013. "Access to intellectual property for innovation: Evidence on problems and coping strategies from German firms," Research Policy, Elsevier, vol. 42(2), pages 529-541.
    2. Iain M. Cockburn & Megan J. MacGarvie & Elisabeth Müller, 2010. "Patent thickets, licensing and innovative performance," Industrial and Corporate Change, Oxford University Press, vol. 19(3), pages 899-925, June.

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