The quote in the title refers to a recurring principle in the Antitrust Guidelines for the Licens... more The quote in the title refers to a recurring principle in the Antitrust Guidelines for the Licensing of Intellectual Property, issued jointly by the US Department of Justice and the Federal Trade Commission in 1995. That report states that "The Agencies" general approach in analyzing a licensing restraint under the rule of reason is to inquire whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects." We apply this standard of evaluation to recent proposals for joint licensing negotiations in standard setting contexts, which have been offered as a solution to the problem of opportunistic licensing and patent hold up. We find that, to the contrary, joint negotiations are not "reasonably necessary" to prevent hold up. Instead, other more moderate policy solutions that take advantage of existing institutional features within standard setting bodies have a greater likelihood of preventing hold up without running the risk of anticompetitive licensee collusion that is present with joint negotiations. In particular, we posit that standard setting bodies should set voting rules to obtain majority support in the selection of technologies for a standard and should consider means of encouraging ex ante bilateral negotiations. In addition, competition authorities could focus on the enforcement of non-discriminatory licensing as a means of preventing anticompetitive opportunistic hold up.
This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap ... more This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap for patents incorporated into a standard. In particular, we evaluate the \Incremental Value" rule as a way to reward firms that contribute technology to a standard. This rule has been proposed as a means of avoiding patent hold-up of licensing firms by granting patent holders compensation equal to the value that their technology contributes to the standard on an ex-ante basis, as compared to the next best alternative. Our analysis shows that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in the SSO. Specifically, firms being rewarded according to this rule will inefficiently decide not to join the SSO, under the expectation that their technology becomes ex-post essential at which point they may negotiate larger payments from the SSO.
Under the legal doctrine of first sale, or patent exhaustion, a patent holder's ability to licens... more Under the legal doctrine of first sale, or patent exhaustion, a patent holder's ability to license multiple parties along a production chain is restricted. How and when such restrictions should be applied is a controversial issue, as evidenced by the Supreme Court's granting certiorari in the Quanta case. The issue is important, as it has significant implications for how firms can license in vertically disaggregated industries. We explore this issue from an economic viewpoint and find that under ideal circumstances how royalty rates are split along the production chain has no real consequence for social welfare. Even when we depart from ideal conditions, however, we still find no economic justification for a strict application of patent exhaustion. To the contrary, we show there are often private and social advantages to charging royalties at multiple stages. Our results advocate for a flexible application of the first sale doctrine, where exhaustion holds as a default rule but can be easily overwritten in patent contracts.
It is commonly argued that in recent years pharmaceutical companies have directed their R&D towar... more It is commonly argued that in recent years pharmaceutical companies have directed their R&D towards small improvements of existing compounds instead of more risky drastic innovations. In this paper we show that this bias towards small innovations is likely to be linked to the lack of market sensitivity of a part of the demand to changes in prices. Compared to their social contribution, small innovations are relatively more profitable than large ones because they are targeted to inelastic segments of the demand. We also study the effect over R&D incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure. Finally, we extend the analysis to competition in research.
This paper presents a model of cumulative innovation where firms are heterogeneous in their resea... more This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract. * We thank Fernando Alvarez and Narayana Kocherlakota for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
This paper presents a model of cumulative innovation where firms are heterogeneous in their resea... more This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract. * We thank Fernando Alvarez and Narayana Kocherlakota for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
This paper presents a model of cumulative innovation where firms are heterogeneous in their resea... more This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract. * We thank Fernando Alvarez and Narayana Kocherlakota for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
This paper assesses the importance of intellectual property (IP) protection for innovation in the... more This paper assesses the importance of intellectual property (IP) protection for innovation in the context of a model of the industry dynamics in which business niches can be monopolized by the holders of valuable IP. Successfully developed innovations add to the stock of valuable IP but also detract from it by turning some older IP invaluable. IP may also turn invaluable as a result of imitation. We consider the case in which innovations are generated by financially constrained entrepreneurs who are partly motivated by the search for independent business success. We find that the protection against subsequent innovators is counterproductive for innovation and welfare, while some (generally not full) protection against imitation is good in both dimensions. We also find that the net welfare gains from increasing IP protection are increasing with the tightness of financial constraints.
In the presence of moral hazard, the optimal contract for a durable-goods monopolist is a lease w... more In the presence of moral hazard, the optimal contract for a durable-goods monopolist is a lease with an option to buy. This contract is optimal regardless of the monopolist's ability to commit and creates inefficient scrappage.
This paper analyzes the current trend towards firms' self-regulation as opposed to the formal reg... more This paper analyzes the current trend towards firms' self-regulation as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market (conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an inefficiently higher externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.
International Journal of Industrial Organization, 2006
In this paper we study the optimal licensing agreement between a patentholder of a cost-reducing ... more In this paper we study the optimal licensing agreement between a patentholder of a cost-reducing innovation and firms that have heterogeneous uses for the new technology. We consider the case in which these firms are competitors in a downstream market. We extend the competition environment among the licensees beyond the Cournot/Bertrand models considered by the previous literature to a framework with differentiated products. We also assume that potential licensees have private information about the usefulness of the new technology. We characterize two purposes the optimal licensing contract serves to the patentholder: separation of the licensees and competition softening in the downstream market. We also describe how the optimal contract changes with the degree of product differentiation.
2011 7th International Conference on Standardization and Innovation in Information Technology (SIIT), 2011
ABSTRACT Patent hold-up and opportunistic licensing within cooperative standard setting organizat... more ABSTRACT Patent hold-up and opportunistic licensing within cooperative standard setting organizations have received considerable attention in academic and policy circles, and a number of rules and policies have been suggested to curb these problems. In our Payments and Participation paper, summarized above, we consider one of the most popular suggestions: capping patent holder licensing fees at the incremental value that the patented technology contributes to the standard. The idea behind this cap would be to limit a patent holder's licensing fees to the level that could be obtained ex ante, before the standard is fully developed and when the patented technology may compete with alternatives.
One proposal put forth in the academic literature for preventing patent hold up and other such op... more One proposal put forth in the academic literature for preventing patent hold up and other such opportunistic licensing within standard setting
This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap ... more This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap for patents incorporated into a standard. In particular, we evaluate the \Incremental Value" rule as a way to reward firms that contribute technology to a standard. This rule has been proposed as a means of avoiding patent hold-up of licensing firms by granting patent holders compensation equal to the value that their technology contributes to the standard on an ex-ante basis, as compared to the next best alternative. Our analysis shows that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in the SSO. Specifically, firms being rewarded according to this rule will inefficiently decide not to join the SSO, under the expectation that their technology becomes ex-post essential at which point they may negotiate larger payments from the SSO.
The quote in the title refers to a recurring principle in the Antitrust Guidelines for the Licens... more The quote in the title refers to a recurring principle in the Antitrust Guidelines for the Licensing of Intellectual Property, issued jointly by the US Department of Justice and the Federal Trade Commission in 1995. That report states that "The Agencies" general approach in analyzing a licensing restraint under the rule of reason is to inquire whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects." We apply this standard of evaluation to recent proposals for joint licensing negotiations in standard setting contexts, which have been offered as a solution to the problem of opportunistic licensing and patent hold up. We find that, to the contrary, joint negotiations are not "reasonably necessary" to prevent hold up. Instead, other more moderate policy solutions that take advantage of existing institutional features within standard setting bodies have a greater likelihood of preventing hold up without running the risk of anticompetitive licensee collusion that is present with joint negotiations. In particular, we posit that standard setting bodies should set voting rules to obtain majority support in the selection of technologies for a standard and should consider means of encouraging ex ante bilateral negotiations. In addition, competition authorities could focus on the enforcement of non-discriminatory licensing as a means of preventing anticompetitive opportunistic hold up.
This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap ... more This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap for patents incorporated into a standard. In particular, we evaluate the \Incremental Value" rule as a way to reward firms that contribute technology to a standard. This rule has been proposed as a means of avoiding patent hold-up of licensing firms by granting patent holders compensation equal to the value that their technology contributes to the standard on an ex-ante basis, as compared to the next best alternative. Our analysis shows that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in the SSO. Specifically, firms being rewarded according to this rule will inefficiently decide not to join the SSO, under the expectation that their technology becomes ex-post essential at which point they may negotiate larger payments from the SSO.
Under the legal doctrine of first sale, or patent exhaustion, a patent holder's ability to licens... more Under the legal doctrine of first sale, or patent exhaustion, a patent holder's ability to license multiple parties along a production chain is restricted. How and when such restrictions should be applied is a controversial issue, as evidenced by the Supreme Court's granting certiorari in the Quanta case. The issue is important, as it has significant implications for how firms can license in vertically disaggregated industries. We explore this issue from an economic viewpoint and find that under ideal circumstances how royalty rates are split along the production chain has no real consequence for social welfare. Even when we depart from ideal conditions, however, we still find no economic justification for a strict application of patent exhaustion. To the contrary, we show there are often private and social advantages to charging royalties at multiple stages. Our results advocate for a flexible application of the first sale doctrine, where exhaustion holds as a default rule but can be easily overwritten in patent contracts.
It is commonly argued that in recent years pharmaceutical companies have directed their R&D towar... more It is commonly argued that in recent years pharmaceutical companies have directed their R&D towards small improvements of existing compounds instead of more risky drastic innovations. In this paper we show that this bias towards small innovations is likely to be linked to the lack of market sensitivity of a part of the demand to changes in prices. Compared to their social contribution, small innovations are relatively more profitable than large ones because they are targeted to inelastic segments of the demand. We also study the effect over R&D incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure. Finally, we extend the analysis to competition in research.
This paper presents a model of cumulative innovation where firms are heterogeneous in their resea... more This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract. * We thank Fernando Alvarez and Narayana Kocherlakota for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
This paper presents a model of cumulative innovation where firms are heterogeneous in their resea... more This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract. * We thank Fernando Alvarez and Narayana Kocherlakota for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
This paper presents a model of cumulative innovation where firms are heterogeneous in their resea... more This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract. * We thank Fernando Alvarez and Narayana Kocherlakota for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
This paper assesses the importance of intellectual property (IP) protection for innovation in the... more This paper assesses the importance of intellectual property (IP) protection for innovation in the context of a model of the industry dynamics in which business niches can be monopolized by the holders of valuable IP. Successfully developed innovations add to the stock of valuable IP but also detract from it by turning some older IP invaluable. IP may also turn invaluable as a result of imitation. We consider the case in which innovations are generated by financially constrained entrepreneurs who are partly motivated by the search for independent business success. We find that the protection against subsequent innovators is counterproductive for innovation and welfare, while some (generally not full) protection against imitation is good in both dimensions. We also find that the net welfare gains from increasing IP protection are increasing with the tightness of financial constraints.
In the presence of moral hazard, the optimal contract for a durable-goods monopolist is a lease w... more In the presence of moral hazard, the optimal contract for a durable-goods monopolist is a lease with an option to buy. This contract is optimal regardless of the monopolist's ability to commit and creates inefficient scrappage.
This paper analyzes the current trend towards firms' self-regulation as opposed to the formal reg... more This paper analyzes the current trend towards firms' self-regulation as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market (conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an inefficiently higher externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.
International Journal of Industrial Organization, 2006
In this paper we study the optimal licensing agreement between a patentholder of a cost-reducing ... more In this paper we study the optimal licensing agreement between a patentholder of a cost-reducing innovation and firms that have heterogeneous uses for the new technology. We consider the case in which these firms are competitors in a downstream market. We extend the competition environment among the licensees beyond the Cournot/Bertrand models considered by the previous literature to a framework with differentiated products. We also assume that potential licensees have private information about the usefulness of the new technology. We characterize two purposes the optimal licensing contract serves to the patentholder: separation of the licensees and competition softening in the downstream market. We also describe how the optimal contract changes with the degree of product differentiation.
2011 7th International Conference on Standardization and Innovation in Information Technology (SIIT), 2011
ABSTRACT Patent hold-up and opportunistic licensing within cooperative standard setting organizat... more ABSTRACT Patent hold-up and opportunistic licensing within cooperative standard setting organizations have received considerable attention in academic and policy circles, and a number of rules and policies have been suggested to curb these problems. In our Payments and Participation paper, summarized above, we consider one of the most popular suggestions: capping patent holder licensing fees at the incremental value that the patented technology contributes to the standard. The idea behind this cap would be to limit a patent holder's licensing fees to the level that could be obtained ex ante, before the standard is fully developed and when the patented technology may compete with alternatives.
One proposal put forth in the academic literature for preventing patent hold up and other such op... more One proposal put forth in the academic literature for preventing patent hold up and other such opportunistic licensing within standard setting
This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap ... more This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap for patents incorporated into a standard. In particular, we evaluate the \Incremental Value" rule as a way to reward firms that contribute technology to a standard. This rule has been proposed as a means of avoiding patent hold-up of licensing firms by granting patent holders compensation equal to the value that their technology contributes to the standard on an ex-ante basis, as compared to the next best alternative. Our analysis shows that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in the SSO. Specifically, firms being rewarded according to this rule will inefficiently decide not to join the SSO, under the expectation that their technology becomes ex-post essential at which point they may negotiate larger payments from the SSO.
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Papers by Gerard Llobet