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Complementary Patents and Market Structure

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  • Schmidt, Klaus M.

Abstract

Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always benefits from entry and innovation

Suggested Citation

  • Schmidt, Klaus M., 2009. "Complementary Patents and Market Structure," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 274, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:274
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    Cited by:

    1. Pierre Larouche & Florian Schuett, 2019. "Repeated interaction in standard setting," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(3), pages 488-509, June.
    2. Yen-Ju Lin & Yan-Shu Lin & Pei-Cyuan Shih, 2022. "Welfare reducing vertical licensing in the presence of complementary inputs," Journal of Economics, Springer, vol. 137(2), pages 121-143, October.
    3. Rey, Patrick & Salant, David, 2012. "Abuse of dominance and licensing of intellectual property," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 518-527.
    4. Jan Boone & Florian Schuett & Emanuele Tarantino, 2024. "Price Commitments in Standard Setting under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 72(1), pages 3-19, March.
    5. Atle Haugen & Steffen Juranek, 2023. "Classroom experiments on technology licensing: Royalty stacking, cross-licensing, and patent pools," The Journal of Economic Education, Taylor & Francis Journals, vol. 54(2), pages 113-125, April.
    6. Rockett, Katharine, 2010. "Property Rights and Invention," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 315-380, Elsevier.
    7. Layne-Farrar, Anne & Llobet, Gerard, 2014. "Moving beyond simple examples: Assessing the incremental value rule within standards," International Journal of Industrial Organization, Elsevier, vol. 36(C), pages 57-69.
    8. Gastón Llanes & Joaquín Poblete, 2014. "Ex Ante Agreements in Standard Setting and Patent‐Pool Formation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(1), pages 50-67, March.
    9. Richard Schmalensee, 2009. "Standard‐Setting, Innovation Specialists And Competition Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 526-552, September.
    10. Arijit Mukherjee, 2013. "Patent pool under endogenous technology choice," Discussion Paper Series 2013_07, Department of Economics, Loughborough University, revised Jul 2013.
    11. Dequiedt, Vianney & Versaevel, Bruno, 2013. "Patent pools and dynamic R&D incentives," International Review of Law and Economics, Elsevier, vol. 36(C), pages 59-69.
    12. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.
    13. Filippini Luigi & Vergari Cecilia, 2017. "Vertical Integration Smooths Innovation Diffusion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(3), pages 1-22, July.
    14. Gastón Llanes, 2019. "Ex-ante Agreements and FRAND Commitments in a Repeated Game of Standard-Setting Organizations," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(1), pages 159-174, February.
    15. Schmidt, Klaus M., 2010. "Standards, Innovation Incentives, and the Formation of Patent Pools," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 342, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    16. Liu, Xingyi, 2016. "Vertical integration and innovation," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 88-120.
    17. Fu, Xiao & Tan, Guofu & Wang, Jin, 2023. "Policy orientations and technology choices in standards wars," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    18. Denicolo, Vincenzo & Zanchettin, Piercarlo, 2018. "Some Simple Economics of Patent Protection for Complex Technologies," CEPR Discussion Papers 13087, C.E.P.R. Discussion Papers.
    19. Denicolò, Vincenzo & Zanchettin, Piercarlo, 2022. "Patent protection for complex technologies," International Journal of Industrial Organization, Elsevier, vol. 81(C).
    20. Spulber, Daniel F., 2016. "Patent licensing and bargaining with innovative complements and substitutes," Research in Economics, Elsevier, vol. 70(4), pages 693-713.

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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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