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Royalty Stacking and Validity Challenges: The Inverse Cournot Effect

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  • Gerard Llobet
  • Jorge Padilla

Abstract

This paper shows that the well‐known royalty‐stacking problem is not robust to considering licensors with patents of heterogeneous strength due to the Inverse Cournot effect. The incentives for a downstream producer to challenge a weak patent in court increase when the total royalty rate is lower. The Inverse Cournot effect generates a moderation force in the royalty rate of strong patent holders forcing weak licensors to reduce their royalties to avoid litigation and causing an increase in output. This effect is mitigated when all firms have weak patents, making royalty stacking a more relevant concern in that case.

Suggested Citation

  • Gerard Llobet & Jorge Padilla, 2023. "Royalty Stacking and Validity Challenges: The Inverse Cournot Effect," Journal of Industrial Economics, Wiley Blackwell, vol. 71(3), pages 593-625, September.
    • Handle: RePEc:bla:jindec:v:71:y:2023:i:3:p:593-625
    DOI: 10.1111/joie.12335
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