Abuse of Dominance and Licensing of Intellectual Property
54 Pages Posted: 18 Nov 2008
Date Written: September 1, 2008
Abstract
This paper examines the impact of the licensing policies of one or more upstream owners of \textit{essential} intellectual property (\textit{IP} hereafter) on the downstream firms that require access to that IP, as well as on consumers and social welfare. The paper considers a model in which there is product differentiation downstream. License fees and fixed entry costs determine the number of downstream competitors and thus variety.
We first consider the case where there is a single upstream owner of essential IP. Increasing the number of licenses enhances product variety, which creates added value, but it also intensifies downstream competition, which dissipates profits. We derive conditions under which the upstream IP monopoly will then want to provide an excessive or insufficient number of licenses, relative to the number that maximizes consumer surplus or social welfare.
When there are multiple owners of essential IP, royalty stacking can reduce the number of the downstream licensees, but also the downstream equilibrium prices the consumers face. The paper derives conditions determining whether this reduction in downstream price and variety is beneficial to consumers or society.
Finally, the paper explores the impact of alternative licensing policies. With fixed license fees or royalties expressed as a percentage of the price, an upstream IP owner cannot control the intensity of downstream competition. In contrast, volume-based license fees (i.e., per-unit access fees), do permit an upstream owner to control downstream competition and to replicate the outcome of complete integration. The paper also shows that vertical integration can have little impact on downstream competition and licensing terms when IP owners charge fixed or volume-based access fees.
Keywords: Intellectual Property, Vertical Integration
JEL Classification: L5, L10
Suggested Citation: Suggested Citation
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