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Discussion Paper Details

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Title: 'Essential' Patents, FRAND Royalties and Technological Standards

Author(s): Mathias Dewatripont and Patrick Legros

Publication Date: August 2008

Keyword(s): Frand, padding, royalty, Standard setting organization and weak patent

Programme Area(s): Industrial Organization

Abstract: In this paper we abandon the usual assumption that patents bring known benefits to the industry or that their benefits are known to all parties. When royalty payments are increasing in one?s patent portfolio, private information about the quality of patents leads to a variety of distortions, in particular the incentives of firms to 'pad' by contributing weak patents. Three main results that emerge from the analysis are that: (i) the threat of court disputes reduces incentives to pad but at the cost of lower production of strong patents; (ii) mitigating this undesirable side-effect calls for a simultaneous increase in the cost of padding, that is, a better filtering of patent applications; (iii) upstream firms have more incentives to pad than vertically-integrated firms which internalize the fact that patent proliferation raises the share of profits going to the upstream segment of the industry but at the expense of its downstream segment. This seems consistent with recent evidence concerning padding.

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Bibliographic Reference

Dewatripont, M and Legros, P. 2008. ''Essential' Patents, FRAND Royalties and Technological Standards'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6925