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Royalty Stacking in High Tech Industries: Separating Myth from Reality


  • Geradin, Damien
  • Layne-Farrar, Anna
  • Padilla, Atilano Jorge


A few recent contributions have claimed that in high-tech industries—where innovation is often cumulative and products include many components which are protected by patents in the hands of many different patent holders—the cost of obtaining all necessary licenses is too high. Some have even requested sweeping policy reforms to deal with the so-called royalty stacking problem. In this Essay we find that the empirical evidence—including new evidence for the 3G telecom industry—does not corroborate the gloomy predictions of the proponents of the royalty stacking hypothesis. A careful look at the theoretical underpinnings of this hypothesis explains the lack of empirical support. First, three necessary conditions must be satisfied for a royalty stacking problem to exist: (a) innovation must be cumulative, so that the patents are complementary; (b) there must be many patents for a given product; and (c) the many patents must be held by numerous, distinct rights holders. Second, royalty stacking may not be a problem even if the three necessary conditions are met; i.e., the three necessary conditions are not sufficient. And, third, several market mechanisms, such as cross licensing or voluntary patent pools, can be used to mitigate the costs of multiple concurrent patent negotiations. We conclude that the so-called royalty stacking problem is more myth than reality and that there is no reason to adopt the dramatic reforms in antitrust and patent law that have been recently proposed by, inter alia, Lemley and Shapiro (2006).

Suggested Citation

  • Geradin, Damien & Layne-Farrar, Anna & Padilla, Atilano Jorge, 2007. "Royalty Stacking in High Tech Industries: Separating Myth from Reality," CEPR Discussion Papers 6091, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6091

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    References listed on IDEAS

    1. 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.
    2. Jaffe, Adam B, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value," American Economic Review, American Economic Association, vol. 76(5), pages 984-1001, December.
    3. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
    4. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    5. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-784, July.
    6. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    7. Scherer, F. M. & Harhoff, Dietmar, 2000. "Technology policy for a world of skew-distributed outcomes," Research Policy, Elsevier, vol. 29(4-5), pages 559-566, April.
    8. Paul A. David, 2005. "The Economic Logic of “Open Science” and the Balance between Private Property Rights and the Public Domain in Scientific Data and," Development and Comp Systems 0502006, EconWPA.
    9. Rosemarie Ham Ziedonis, 2004. "Don't Fence Me In: Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms," Management Science, INFORMS, vol. 50(6), pages 804-820, June.
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    Cited by:

    1. Iain M. Cockburn & Megan J. MacGarvie & Elisabeth Müller, 2010. "Patent thickets, licensing and innovative performance," Industrial and Corporate Change, Oxford University Press, vol. 19(3), pages 899-925, June.
    2. Alexandrov, Alexei & Pittman, Russell & Ukhaneva, Olga, 2017. "Royalty stacking in the U.S. freight railroads: Cournot vs. Coase," MPRA Paper 78249, University Library of Munich, Germany.
    3. Mueller, Elisabeth & Cockburn, Iain M. & MacGarvie, Megan, 2013. "Access to intellectual property for innovation: Evidence on problems and coping strategies from German firms," Research Policy, Elsevier, vol. 42(2), pages 529-541.

    More about this item


    excessive royalties; hold up; innovation; mobile telecommunications; patent licensing;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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