DP11624 The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents

Author(s): Gerard Llobet, Atilano Jorge Padilla
Publication Date: November 2016
Keyword(s): Intellectual Property, Patent Licensing, Patent Pools, R&D Investment, Standard Setting Organizations
JEL(s): L15, L24, O31, O34
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11624

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.