‘Essential’ Patents, Frand Royalties and Technological Standards

25 Pages Posted: 31 Dec 2013  

Mathias Dewatripont

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR)

Patrick Legros

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR)

Date Written: December 2013

Abstract

Standard Setting Organizations have developed FRAND agreements in order to prevent firms from holding up other participants once a standard is created. We analyze here the consequences of such agreements - in particular the requirements of fairness and non‐discrimination - for the creation of technological standards that require the participation of existing patent holders. We abandon the usual assumption that patents bring known benefits to the industry or that their benefits are known to all parties. When royalty payments are increasing in one's patent portfolio, as is implicitly the case in FRAND agreements, private information about the quality of patents leads to a variety of distortions, in particular the incentives of firms to ‘pad’ by contributing patents that are ‘inessential’ for the given standard, a phenomenon that seems to be widespread. Several results emerge from the analysis: (i) the number of inessential patents co‐varies positively with the number of essential patents; (ii) there is over‐investment relative to the second‐best, that is when padding cannot be avoided and (iii) the threat of disputes reduces incentives to pad but at the cost of lower production of strong patents; (iv) mitigating this undesirable side‐effect calls for a simultaneous increase in the cost of padding, through a better filtering of patent applications.

Suggested Citation

Dewatripont, Mathias and Legros, Patrick, ‘Essential’ Patents, Frand Royalties and Technological Standards (December 2013). The Journal of Industrial Economics, Vol. 61, Issue 4, pp. 913-937, 2013. Available at SSRN: https://ssrn.com/abstract=2373305 or http://dx.doi.org/10.1111/joie.12033

Mathias Dewatripont (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4217/4 (Phone)
+32 2 650 4475 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Patrick Legros

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4219/3 (Phone)
+32 2 650 4475 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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