Price Commitments in Standard Setting Under Asymmetric Information
17 Pages Posted: 21 Mar 2019 Last revised: 22 Mar 2019
Date Written: March 20, 2019
Many observers have voiced concerns that standards create essentiality and thus monopoly power for the holders of standard essential patents (SEPs). To address these concerns, Lerner and Tirole (2015) advocate structured price commitments, whereby SEP holders commit to the maximum royalty they would charge were their technology included in the standard. We consider a setting in which a technology implementer holds private information about demand. In this setting, price commitments increase eﬃciency not only by curbing SEP holders’ market power, but also by alleviating distortions in the design of the royalty scheme. In the absence of price commitments, the SEP holder distorts the implementer’s output downward in the low-demand state to reduce the high-demand type’s information rent. Price commitments reduce this distortion.
Keywords: standardization, standard-essential patents, price commitments, information asymmetry
JEL Classification: D82, L15, L24
Suggested Citation: Suggested Citation