Working Paper: CEPR ID: DP7005
Authors: Klaus M. Schmidt
Abstract: Many high technology goods are based on standards that require access to several patents that are owned by different IP holders. We investigate the royalties chosen by IP holders under different market structures. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders (or a patent pool) solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always encourages entry and innovation.
Keywords: complementary patents; IP rights; licensing; patent pool; standards; vertical integration
JEL Codes: K11; L15; L24; O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Vertical Integration (L22) | Higher Royalties (D33) |
| Vertical Integration (L22) | Reduced Output (E23) |
| Higher Royalties (D33) | Reduced Output (E23) |
| Horizontal Integration (L22) | Reduced Royalties (D45) |
| Horizontal Integration (L22) | Increased Total Output (E23) |
| Horizontal Integration (L22) | Encourages Entry (D43) |
| Horizontal Integration (L22) | Encourages Innovation (O31) |
| Vertically Integrated Firms (L22) | Raise Royalty Rates (L78) |
| Raise Royalty Rates (L78) | Raise Rivals' Costs (D43) |
| Raise Rivals' Costs (D43) | Affect Competition and Innovation Negatively (L49) |