Working Paper: CEPR ID: DP17405
Authors: Gerard Llobet; Damien J Neven
Abstract: We analyze the welfare effects of patent licensing at different stages of the production chain and the level at which a patent holder would choose to license. We consider the incentive to invest in enhancing the value of the final product at the different stages of production. We study the effects of allowing a patent holder to discriminate among different products downstream and/or accounting for differences in information that potential licensees at different stages might have about the validity of the patent. We show that in those circumstances, a conflict arises between the stage at which patent holders prefer to license their technology and the stage at which it is optimal from a social standpoint that licensing takes place. Whereas the patent holder usually prefers to target downstream firms, society is often better off if upstream firms take the license.
Keywords: royalty neutrality; standard setting organizations; patent licensing; R&D investment
JEL Codes: L15; L24; O31; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| patent holders can discriminate among products (D45) | divergence between licensing stage preferred by patent holders and stage that maximizes social welfare (D45) |
| downstream licensing (L24) | undermine investment incentives for both upstream and downstream firms (H32) |
| price discrimination (D40) | reduced quality investments (G31) |
| upstream licensing is socially preferable (D45) | encourages more robust investment incentives (E22) |
| uncertainty surrounding patent validity (L49) | affect licensing decisions (D45) |
| method of licensing (upstream vs. downstream) (D45) | directly influences the level of investment in quality improvements (L15) |