The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents

50 Pages Posted: 9 Nov 2016 Last revised: 13 Mar 2017

See all articles by Gerard Llobet

Gerard Llobet

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Jorge Padilla

Compass Lexecon

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2017

Abstract

It has been commonly argued that the decision of a large number of inventors to license complementary patents necessary for the development of a product leads to excessively large royalties. This well-known Cournot-complements or royalty-stacking effect would hurt efficiency and downstream competition. In this paper we show that when we consider patent litigation and introduce heterogeneity in the portfolio of different firms these results change substantially due to what we denote the Inverse Cournot effect. We show that the lower the total royalty that a downstream producer pays, the lower the royalty that patent holders restricted by the threat of litigation of downstream producers will charge. This effect generates a moderation force in the royalty that unconstrained large patent holders will charge that may overturn some of the standard predictions in the literature. Interestingly, though, this effect can be less relevant when all patent portfolios are weak making royalty stacking more important.

Keywords: Intellectual Property, Standard Setting Organizations, Patent Licensing, R&D Investment, Patent Pools

JEL Classification: L15, L24, O31, O34

Suggested Citation

Llobet, Gerard and Padilla, Jorge, The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents (February 28, 2017). Available at SSRN: https://ssrn.com/abstract=2866389 or http://dx.doi.org/10.2139/ssrn.2866389

Gerard Llobet (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
SPAIN
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

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