Licensing Standard Essential Patents: Bargaining and Incentives to Invent
44 Pages Posted: 1 Mar 2019
Date Written: February 20, 2019
Inventors license Standard Essential Patents (SEPs) to producers. Inventors and producers determine royalties through bilateral bargaining. Total royalties and royalties per unit of output are lower with bargaining than with a bundled monopoly patent pool. Bargaining also implies that competing producers maximize profits without double marginalization. Incentives to invent depend on the bargaining power of inventors relative to producers. If inventors have sufficient bargaining power, expected social welfare is greater with bargaining than with a bundled monopoly patent pool. This contradicts policy predictions based on the "Cournot Effect". Downstream competition need not increase incentives to invent, reversing the "Arrow Hypothesis". The analysis shows that markets can be efficient with complementary inventions. Public policies that diminish the bargaining power of inventors decrease incentives to invent and can reduce expected social welfare.
Keywords: standards, bargaining, complements, substitutes, royalties, licenses, patents, invention, innovation
JEL Classification: C7, O3, D4
Suggested Citation: Suggested Citation