DP17405 Investment and Patent Licensing in the Value Chain
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.