Sunk Costs, Free-Riding Justifications, and Compulsory Licensing of Interfaces

25 Pages Posted: 15 Jun 2008  

Net Le

London School of Economics & Political Science (LSE)

Abstract

This paper addresses two popular arguments against a compulsory license of software interface, using risk analysis methodology. These concerns are the non-recovery of sunk costs and the threats posed by free riders. My argument is that while both concerns are legitimate, they are remediable. The purpose of the law is not to allow the incumbent to recover its 'sunk costs', but to give sufficient incentives for it to innovate. These two incentives are the monetary incentives (finding fair access fees and stimulating cooperation with the entrants after the license) and the time incentive (finding a period during which refusal to license is acceptable). With respect to the fair amount of access fees, it is better to provide a mechanism so that the licensor and the licensee can negotiate the fees themselves, rather than to impose a strict method of fee calculation. If the monetary incentives alone are sufficient to generate motivation for innovation, the time incentive should not be used.

Keywords: Sunk Costs, Licensing

Suggested Citation

Le, Net, Sunk Costs, Free-Riding Justifications, and Compulsory Licensing of Interfaces. Review of Economic Research on Copyright Issues, Vol. 1, Iss. 2, pp. 29-53, 2004. Available at SSRN: https://ssrn.com/abstract=1145892

Net Le (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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