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Patent Exhaustion and Licensing in the Supply Chain

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  • Jay Pil Choi
  • Heiko Gerlach

Abstract

This paper analyzes private and social incentives to levy an ad valorem licensing fee in a supply chain governed by the legal principle of patent exhaustion. With perfect competition at the upstream and downstream stage, the choice of the licensing segment is irrelevant for the patent holder and consumers. When exactly one segment of the value chain is monopolistic while the other one is competitive, the patent holder prefers licensing at the monopolistic stage leading to an alignment of private and social incentives. With imperfect competition at both stages, excessive downstream licensing can arise. We demonstrate that charging licensing fees at both stages of the supply chain (“double-dipping”) can be profitable for the patent holder and beneficial for consumers. We discuss the implications of this result for the application of the patent exhaustion principle.

Suggested Citation

  • Jay Pil Choi & Heiko Gerlach, 2024. "Patent Exhaustion and Licensing in the Supply Chain," CESifo Working Paper Series 11313, CESifo.
    • Handle: RePEc:ces:ceswps:_11313
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    References listed on IDEAS

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    1. D. B. Suits & R. A. Musgrave, 1953. "Ad Valorem and Unit Taxes Compared," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 67(4), pages 598-604.
    2. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations

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