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"Essential" Patents, FRAND Royalties and Technological Standards

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  • Mathias Dewatripont
  • Patrick Legros

Abstract

In this paper we abandon the usual assumption that patents bring known benefits to the industry or that their benefits are known to all parties. When royalty payments are increasing in one's patent portfolio, private information about the quality of patents leads to a variety of distortions, in particular the incentives of firms to "pad" by contributing weak patents. Three main results that emerge from the analysis are that: (i) the threat of court disputes reduces incentives to pad but at the cost of lower production of strong patents; (ii) mitigating this undesirable side-effect calls for a simultaneous increase in the cost of padding, that is, a better filtering of patent applications; (iii) upstream firms have more incentives to pad than vertically-integrated firms which internalize the fact that patent proliferation raises the share of profits going to the upstream segment of the industry but at the expense of its downstream segment. This seems consistent with recent evidence concerning padding.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number ECARES 2008-010.

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Length: 30 p.
Date of creation: Mar 2008
Date of revision:
Publication status: Published by:
Handle: RePEc:eca:wpaper:2008_010

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Keywords: padding; royalty; standard setting organization; weak patent; Frand;

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References

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  1. Carl Shapiro, 2001. "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting," NBER Chapters, in: Innovation Policy and the Economy, Volume 1, pages 119-150 National Bureau of Economic Research, Inc.
  2. Chiao, Benjamin & Lerner, Josh & Tirole, Jean, 2006. "The Rules of Standard Setting Organizations: an Empirical Analysis," IDEI Working Papers 388, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Aoki, Reiko & Nagaoka, Sadao, 2004. "The Consortium Standard and Patent Pools," Discussion Paper 222, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  4. Jaffe Adam B. & Lerner Josh, 2006. "Innovation and Its Discontents," Capitalism and Society, De Gruyter, vol. 1(3), pages 1-36, December.
  5. Lerner, Josh & Tirole, Jean, 2003. "Efficient Patent Pools," IDEI Working Papers 211, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Mark A. Lemley & Carl Shapiro, 2005. "Probabilistic Patents," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 75-98, Spring.
  7. Joseph Farrell & Carl Shapiro, 2008. "How Strong Are Weak Patents?," American Economic Review, American Economic Association, vol. 98(4), pages 1347-69, September.
  8. Adam B. Jaffe & Josh Lerner & Scott Stern, 2007. "Innovation Policy and the Economy, Volume 7," NBER Books, National Bureau of Economic Research, Inc, number jaff07-1, October.
  9. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  10. 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.
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Cited by:
  1. Picard, Pierre M. & van Pottelsberghe de la Potterie, Bruno, 2013. "Patent office governance and patent examination quality," Journal of Public Economics, Elsevier, vol. 104(C), pages 14-25.
  2. van Pottelsberghe de la Potterie, Bruno, 2010. "The quality factor in patent systems," CEPR Discussion Papers 7921, C.E.P.R. Discussion Papers.
  3. Schmidt, Klaus M., 2008. "Complementary Patents and Market Structure," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 249, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Andrew F. Newman & Patrick Legros, 2011. "Incomplete Contracts and Industrial Organization: A Survey," Boston University - Department of Economics - Working Papers Series WP2011-036, Boston University - Department of Economics.
  5. Picard, Pierre M & van Pottelsberghe de la Potterie, Bruno, 2011. "Patent Office Governance and Patent System Quality," CEPR Discussion Papers 8338, C.E.P.R. Discussion Papers.
  6. Bruno Van Pottelsberghe & Matthis de Saint-Georges, 2011. "A quality index for patent systems," Working Papers ECARES ECARES 2011-010, ULB -- Universite Libre de Bruxelles.
  7. Katharine Rockett, 2009. "Property Rights and Invention," Economics Discussion Papers 663, University of Essex, Department of Economics.

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