Repeated Interaction in Standard Setting
CentER Discussion Paper No. 2016-021
38 Pages Posted: 11 Jun 2016 Last revised: 10 Mar 2017
Date Written: June 9, 2016
Standardization may allow the owners of standard-essential patents to charge royalty rates exceeding those that would have been negotiated ex ante. In practice, however, standard-setting efforts are often characterized by repeated interaction and complementarities among technologies. These features give firms that contribute technology to standards both the ability and the incentive to avoid excessive royalties by threatening to exclude other technology contributors from future rounds of standardization if they charge royalties exceeding 'fair, reasonable and non-discriminatory' (FRAND) levels. We show that such an outcome can indeed be sustained as a subgame perfect equilibrium and examine how the decision-making rules of standard-setting organizations (SSOs) affect the sustainability of FRAND royalties. Our analysis provides a novel justification for super-majority requirements and other rules frequently adopted by SSOs.
Keywords: standardization, standard-essential patents, FRAND royalties, royalty stacking, repeated games
JEL Classification: C73, L15, L24, O34
Suggested Citation: Suggested Citation