Standard-essential patents and incentives for innovation

Abstract

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