Licensing Complementary Patents: â€œPatent Trollsâ€, Market Structure, and â€œExcessiveâ€ Royalties
The infamous Blackberry case brought new attention to so-called â€œpatent trollsâ€ and began the general association of trolls with â€œnon-practicingâ€ patent holders. This has had important legal consequences: Namely, patent holders have been denied injunctive relief because they did not practice the patents themselves. In this paper we analyze how patent holders â€“â€“ both non-practicing and vertically integrated â€“â€“ choose their royalties depending on the structure of the upstream and downstream markets and the types of licensing agreements available. We show that a vertically integrated firm has an incentive to raise its rivalsâ€™ costs and to restrict entry on the downstream market; incentives that do not hold for non-integrated patent holders. An automatic presumption that a non-integrated patent holder will charge higher royalties than a vertically integrated company is therefore unfounded. Whether a company charges â€œexcessiveâ€ royalties depends on whether there is scope for hold-up, either because of sunk investments on the part of potential licensees or because of â€œweakâ€ patents held by the licensor. These factors are orthogonal to whether patent holders are practicing or not
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