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The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents

Author

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  • Llobet, Gerard
  • Padilla, Jorge
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.

Suggested Citation

  • Llobet, Gerard & Padilla, Jorge, 2016. "The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents," CEPR Discussion Papers 11624, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11624
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    References listed on IDEAS

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    1. Jay Pil Choi & Heiko Gerlach, 2018. "A Model Of Patent Trolls," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 2075-2106, November.
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    3. Gerard Llobet & Jorge Padilla, 2016. "The Optimal Scope of the Royalty Base in Patent Licensing," Journal of Law and Economics, University of Chicago Press, vol. 59(1), pages 45-73.
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    5. Aleksandra Boutin, 2016. "Screening for Good Patent Pools through Price Caps on Individual Licenses," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 64-94, August.
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    More about this item

    Keywords

    Intellectual property; Standard setting organizations; Patent licensing; R&d investment; Patent pools;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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