Standard-essential patents and incentives for innovation
CentER Discussion Paper No. 2020-034
25 Pages Posted: 18 Dec 2020
Date Written: December 16, 2020
Patent holders whose patents are essential to a standard are usually required to license their patents under fair, reasonable, and non-discriminatory (FRAND) terms. This requirement is often interpreted as a price cap such that royalties for the patents do not exceed their pre-standardisation incremental values. Using a theoretical model of innovators with interacting technologies, I consider the problem of choosing the incentive scheme to induce welfare-maximising research investments under the condition that it only uses the values created by the innovators, and analyse the prevalent interpretation of FRAND compared to the optimal scheme. It shows that in some cases, this incremental value rule does not lead to the efficient level of innovation investment.
Keywords: standardisation, standard-essential patents, FRAND, innovation incentives
JEL Classification: L15, O31, O34, O38
Suggested Citation: Suggested Citation