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Abuse of Dominance and Licensing of Intellectual Property

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  • Rey, Patrick
  • Salant, David

Abstract

Patent thickets, layers of licenses a firm needs to be able to offer products that embody technologies owned by multiple firms, and licensing policies have drawn increasing scrutiny from policy makers. Patent thickets involve complementary products, which gives rise to double marginalization -- the so-called royalty stacking problem -- and has the potential to retard diffusion of new technologies and reduce consumer welfare. This paper examines the impact of licensing policies of one or more upstream owners essential} intellectual property (IP) on the downstream firms that require access to that IP. The terms under which downstream firms can access this IP affects entry decisions, product diversity, prices and welfare. We consider both the case in which a single party controls the essential IP and the case in which different parties control complementary pieces of essential IP. We compare the outcome of several alternative standard licensing arrangements, such as flat rate access fees, royalty percentages, per unit fees, patent pools and cross-licensing arrangements, with or without vertical integration. We first consider the case where there is a single upstream owner of essential IP. Increasing the number of licenses enhances product variety, which creates added value, but it also intensifies downstream competition, which dissipates profits. We derive conditions under which the upstream IP monopoly will then want to provide an excessive or insufficient number of licenses, relative to the number that maximizes consumer surplus or social welfare. When there are multiple owners of essential IP, royalty stacking can reduce the number of the downstream licensees, but also the downstream equilibrium prices the consumers face. The paper derives conditions determining whether this reduction in downstream price and variety is beneficial to consumers or society. Finally, the paper explores the impact of alternative licensing policies. With fixed license fees or royalties expressed as a percentage of the price, an upstream IP owner cannot control the intensity of downstream competition. In contrast, volume-based license fees (i.e., per-unit access fees), do permit an upstream owner to control downstream competition and to replicate the outcome of complete integration. The paper also shows that vertical integration can have little impact on downstream competition and licensing terms when IP owners charge fixed or volume-based access fees.

Suggested Citation

  • Rey, Patrick & Salant, David, 2008. "Abuse of Dominance and Licensing of Intellectual Property," MPRA Paper 9454, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:9454
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    References listed on IDEAS

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    Cited by:

    1. Seifert, Jacob, 2013. "Compulsory Licensing, Innovation and Welfare," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79778, Verein für Socialpolitik / German Economic Association.
    2. Kevin Boudreau, 2010. "Open Platform Strategies and Innovation: Granting Access vs. Devolving Control," Management Science, INFORMS, vol. 56(10), pages 1849-1872, October.
    3. Jacob Seifert, 2015. "Welfare effects of compulsory licensing," Journal of Regulatory Economics, Springer, vol. 48(3), pages 317-350, December.
    4. 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.
    5. Elpiniki Bakaouka & Chrysovalantou Milliou, 2016. "Vertical Licensing, Input Pricing, and Entry," DEOS Working Papers 1605, Athens University of Economics and Business.
    6. 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.
    7. Zhang, Huaige & Wang, Xuejun & Qing, Ping & Hong, Xianpei, 2016. "Optimal licensing of uncertain patents in a differentiated Stackelberg duopolistic competition market," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 215-229.
    8. Karbowski, Adam & Prokop, Jacek, 2015. "Patent hold-up and royalty stacking: the case of multiple downstream firms," EconStor Conference Papers 127475, ZBW - German National Library of Economics.
    9. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2013. "Licensing process innovations when losersʼ messages determine royalty rates," Games and Economic Behavior, Elsevier, vol. 82(C), pages 388-402.
    10. Larouche, Pierre & Schütt, Florian, 2016. "Repeated Interaction in Standard Setting," Discussion Paper 2016-010, Tilburg University, Tilburg Law and Economic Center.
    11. Adachi, Takanori & Ebina, Takeshi, 2014. "Double marginalization and cost pass-through: Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss," Economics Letters, Elsevier, vol. 122(2), pages 170-175.

    More about this item

    Keywords

    Patents; Vertical Integration;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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