The Case of the Missing Royalty Stacking in the World Mobile Wireless Industry

Industrial and Corporate Change, Volume 29, Issue 3, June 2020, Pages 827–853, https://doi.org/10.1093/icc/dtz074

36 Pages Posted: 7 Jun 2016 Last revised: 2 Dec 2020

See all articles by Alexander Galetovic

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Kirti Gupta

Qualcomm, Inc.

Date Written: September 9, 2019

Abstract

We build an equilibrium royalty stacking model that links the number of standard-essential patent (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. In this 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 grew 62-fold, at an average rate of 20.1% 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% and -24.8% 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%. A theory based on Lerner and Tirole’s (2015, J. Political Econ., 123(3), 547–586) within-functionality competition yields 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

Galetovic, Alexander and Gupta, Kirti, The Case of the Missing Royalty Stacking in the World Mobile Wireless Industry (September 9, 2019). Industrial and Corporate Change, Volume 29, Issue 3, June 2020, Pages 827–853, https://doi.org/10.1093/icc/dtz074, Available at SSRN: https://ssrn.com/abstract=2790347 or http://dx.doi.org/10.2139/ssrn.2790347

Alexander Galetovic (Contact Author)

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

Kirti Gupta

Qualcomm, Inc. ( email )

5775 Morehouse Drive
San Diego, CA 92121
United States

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