The Case of the Missing Royalty Stacking in the World Mobile Wireless Industry
36 Pages Posted: 7 Jun 2016 Last revised: 30 Nov 2019
Date Written: September 9, 2019
We build an equilibrium royalty stacking model that links the number of SEP holders with the equilibrium quantity, price and cumulative royalty. We show that all observable implications of the theory are inconsistent with the data from the world mobile wireless industry.
The number of SEP holders grew from 2 in 1994 to 130 in 2013. Royalty stacking theory predicts falling or stagnant output, rising selling prices, and rising or stagnant quality-adjusted prices. By contrast, between 1994 and 2013 worldwide yearly device sales 62- fold, at an average rate of 20,1 percent per year, and both selling and quality-adjusted prices fell fast over time. Controlling for technological generation, the real average selling price of a device fell between 11.4 percent to 24.8 percent per year. Similarly, under conservative parametrizations, royalty stacking theory predicts royalty yields which are more than an order of magnitude larger than the observed average cumulative royalty yield charged by SEP holders in practice, which hovers between 3 and 3.5 percent.
A theory based on Lerner and Tiroles (2015) within-functionality competition yileds observable implications consistent with the observed facts. If all the technologies protected by SEPs have meaningful substitutes that cap the royalty that any SEP holder can charge, then the cumulative royalty is independent of demand parameters in the downstream market, and can be as low as the observed average cumulative royalty yield. Moreover, if the product market is competitive, and technological progress is fast, then prices follow costs, quality-adjusted prices protractedly fall, and sales grow fast.
Keywords: royalty stacking, cournot complements, IT, standards
JEL Classification: L1, O31, O38
Suggested Citation: Suggested Citation