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Investment and Patent Licensing in the Value Chain

Author

Listed:
  • Gerard Llobet

    (CEPR)

  • Damien Neven

    (IHEID, Graduate Institute of International and Development Studies, Geneva)

Abstract

At which stage in the production chain should patent licensing takes place? In this paper we show that under realistic circumstances a patent holder would be better off by licensing downstream. This occurs when the licensing revenue can depend on the downstream value of the product either directly or through the use of ad-valorem royalties. We show that the results are similar when, instead, we assume that the downstream licensee is less informed about the validity of the patent. In most cases, downstream licensing increases allocative efficiency. However, it might reduce the incentives to invest by the manufacturers and thereby reduce welfare. We characterize the circumstances under which a conflict arises between the stage at which patent holders prefer to license their technology and the stage at which it is optimal from a social standpoint that licensing takes place.

Suggested Citation

  • Gerard Llobet & Damien Neven, 2022. "Investment and Patent Licensing in the Value Chain," IHEID Working Papers 30-2022, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp30-2022
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    References listed on IDEAS

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    1. Olena Ivus & Edwin L.‐C. Lai & Ted Sichelman, 2020. "An economic model of patent exhaustion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 816-833, October.
    2. Gerard Llobet & Jorge Padilla, 2016. "The Optimal Scope of the Royalty Base in Patent Licensing," Journal of Law and Economics, University of Chicago Press, vol. 59(1), pages 45-73.
    3. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    4. Anne LAYNE-FARRAR & Gerard LLOBET & Jorge PADILLA, 2014. "Patent Licensing in Vertically Disaggregated Industries: The Royalty Allocation Neutrality Principle," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(95), pages 61-84, 3rd quart.
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    Cited by:

    1. Wipusanawan, Chayanin, 2023. "Standard-essential patents, innovation, and competition," Other publications TiSEM 292e319a-9e6a-4465-8f8f-7, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    Royalty Neutrality; Standard Setting Organizations; Patent Licensing; R&D Investment.;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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