On the duration of technology licensing

We model an innovator's choice of payment scheme and duration as a joint decision in a multi-period licensing game with potential future innovations and some irreversibility of technology transfer. We find that it may be optimal to license the innovation for less than the full length of the patent and that royalty contracts can be more profitable than fixed-fee licensing even in the absence of information asymmetry and risk aversion. Moreover, licensing contracts based on royalty have a longer duration than fixed-fee licenses and are more likely to be used in industries where innovations are frequent and intellectual property protection is weak. Our paper also highlights an important link between the study of technology licensing and the theory of durable goods.     

Unionization structure, licensing and innovation

We show the effects of the unionization structure (viz., decentralized and centralized unions) on a firm's incentive for technology licensing and innovation. The incentive for technology licensing is stronger under decentralized unions. We identify circumstances under which the benefit from licensing creates a stronger incentive for innovation under decentralized unions. If the union's preference for employment is high, the benefit from licensing may create higher incentive for innovation under decentralized unions. However, if the union's preference for wage is high enough, the incentive for innovation is higher under a centralized union irrespective of licensing ex-post innovation. If the centralized union decides whether or not to supply workers to all firms, the possibility of higher innovation under decentralized unions increases. We further show that perfectly substitutable workers can be better off under decentralized unions if the labor productivity depends on the unionization structure, which occurs in our analysis when, e.g., licensing after innovation occurs only under decentralized unions or innovation (with no licensing) occurs only under a centralized union.     

What difference does dynamics make? The case of digital cameras

When the well-known BLP model is applied to products with rapid technological changes and declining prices it tends to yield implausible results. A sequence of increasingly sophisticated dynamic demand models, most recently Gowrisankaran and Rysman (2009, hereafter GR), have been developed to overcome these problems. We apply both models to new data on the US digital camera market. In addition, we demonstrate that the GR model can be specified as a BLP model plus an additional set of terms. This suggests that a dynamic model can be estimated as a BLP model plus a non-parametric function which is less computationally demanding. As a first step to implementing this semi-parametric approach we estimate a BLP model augmented with age as a proxy for the non-parametric component. We find that demand for digital cameras is more elastic when demand dynamics is accounted for in both the dynamic model and the BLP model with the age proxy. This suggests that the market is more competitive though the results are consistent with firms engaging in intertemporal price discrimination. Merger simulations predict the lowest price and quantity changes using the GR model.     

Optimal use of patents and trade secrets for complex innovations

This paper studies how an inventor protects a “complex” innovation that involves multiple complementary components. Each component can be protected through either patent or secrecy protection, so that the entire innovation may be protected through a patent-secret combination. Potential entrants might acquire these components either through costly imitation or licensing. I find that, first, secrecy is optimal when the patent length is relatively short; otherwise, a patent-secret combination is optimal; second, the inventor is over-rewarded compared to an inventor with an innovation that is equivalent except that it involves only a single-component so that the entire innovation can be protected through either patent or secrecy protection; and, third, a policy that precludes the use of a patent-secret combination enhances allocative efficiency ex-post but may stifle R&D incentives ex-ante.     

License to Be More Innovative

A patent holder may choose to give up its current leading position through patent licensing in order to increase its incentive to innovate further and thus avoid falling behind its rivals in future R&D races. We show that because of this “catching-up” effect, licensing may occur even when it reduces current industry profits. The overall effect of licensing is to slow down the pace of innovation, as it reduces the licensee's incentive to conduct R&D.     

Patent Hold‐Up and Antitrust: How A Well‐Intentioned Rule Could Retard Innovation

Licensing technology essential to a standard can present a hold‐up problem. After designing new products incorporating a standard, a manufacturer could be confronted by an innovator asserting patent rights to essential technology. This hold‐up problem can be solved with a damages remedy provided by antitrust or some other body of law, but a damages remedy can reduce the innovator's licensing revenue and thereby retard innovation. The availability of an ex post damages remedy also alters the licensing terms in ex ante bargaining with the result that fewer socially beneficial R&D projects are undertaken.     

Patenting in the shadow of independent discoveries by rivals

This paper studies the decision of whether to apply for a patent in a dynamic model in which firms innovate stochastically and independently. In the model, a firm can choose between patenting and maintaining secrecy to protect a successful innovation. I consider a legal environment characterized by imperfect patent protection and no prior user rights. Thus, patenting grants probabilistic protection, and secrecy is effectively maintained until rivals innovate. I show that (1) firms that innovate early are more inclined to choose secrecy, whereas firms that innovate late have a stronger tendency to patent; (2) the incentives to patent increase with the innovation arrival rate; and (3) an increase in the number of firms may cause patenting to occur earlier or later, depending on the strength of patent protection. The socially optimal level of patent protection, which balances the trade-off between the provision of patenting incentives and the avoidance of deadweight loss caused by a monopoly, is lower with a higher innovation arrival rate or a larger number of firms.     

Patent office in innovation policy: Nobody's perfect

The number of patent applications and “bad” patents issued has been rising rapidly in recent years. Based on this trend, we study the overload problem within the Patent Office and its consequences on the firms' R&D incentives. We assume that the examination process of patent applications is imperfect, and that its quality is poorer under congestion. Depending on policy instruments such as submission fees and the toughness of the non-obviousness requirement, the system may result in a high-R&D equilibrium, in which firms self-select in their patent applications, or in an equilibrium with low R&D, opportunistic patent applications and the issuance of bad patents. Multiple equilibria often co-exist, which deeply undermines the effectiveness of policy instruments. We investigate the robustness of our conclusions as to how the value of patent protection is formalized, taking into consideration the introduction of a penalty system for rejected patent applications, as well as the role of commitment to a given patent protection policy.     

Price and quality discrimination in durable goods monopoly with resale trading

We examine a durable goods monopolist’s optimal dynamic price and product quality strategy when buyers are rational and can trade used durables among themselves. In contrast to the usual credibility problem of the durable goods monopolist, intertemporal quality discrimination introduces a time-inconsistency problem of not raising prices against high-valuation consumers who delay purchase for quality upgrades. Resale trading ameliorates this time-inconsistency problem and allows the monopolist to effectively price discriminate, especially when the buyers are patient. The monopolist’s optimal price and quality offers in the new good market exhibit complex dynamic patterns, and new good prices can fall as product quality improves even in the absence of entry threats or learning economies. Initial quality distortions are followed by steady-state quality allocations that are always efficient for the high-valuation buyers, but sometimes also for the marginal consumer-types. Both the resale trading frequency and the price discount for secondhand goods are driven by the pace of strategic quality obsolescence in the new good market.     

Market outcomes and dynamic patent buyouts

Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify new reward mechanisms which complement the patent system and reduce prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government’s innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent’s life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives.     

A structural model on the impact of prediscovery licensing and research joint ventures on innovation and product market efficiency

Using a novel database on prediscovery licensing agreements (one type of R&D cooperation) as well as detailed firm-level and semiconductor market-specific information, we estimate the impact of prediscovery licensing agreements (PDLAs) on innovation and product market efficiency. Our results show that PDLAs reduce innovative activity in the semiconductor industry by 10 percent, or 4089 patents, throughout the 1989–1999 period. On the contrary, research joint ventures (a different type of R&D cooperation) increase innovative activity. Based on a structural model, we provide evidence that PDLAs increase production costs and semiconductor prices by 1 percent, which results in customers paying an additional $1.1 billion for semiconductors per year. Beyond the common concern that R&D cooperations facilitate coordination activities in product markets via price fixing, our study highlights that PDLAs can be used as an instrument to coordinate R&D activities, which can reduce innovation activity and increase costs and prices.     

Patent pools in 5G: The principles for facilitating pool licensing

Patent pools collect patents from multiple patentees and license them out as a package. They offer one-stop-shop licensing efficiencies, reduce transaction costs, and increase the predictability of the licensing environment for the benefit of innovation diffusion. However, pools failed to take off for previous cellular standards. This article analyses both retrospectively the reasons for such failures and prospectively what makes the 5G environment more conductive to pool formation and licensing. Avanci, a patent pool for licensing cellular standards in the Internet of Things (IoT), is a significant development but has limited licensing coverage so far. The article then recommends five policy principles to facilitate pool licensing in the IoT. They include recognising that only enough upstream SEP owners need to join the 5G pool to create a market signalling effect. Some vertically integrated SEP owners may remain outsiders, and some bilateral licensing may co-exist without damaging the pool's success. To encourage upstream SEP owners to join the pool, they should be allowed to set ‘high enough’ royalty rates and divide pools' royalties among members under value proportionality rules. 5G pools must also be flexible and adopt different licensing programs that consider the specificities of each IoT market. Finally, pool administrators should consult with IoT implementers before establishing licensing programs for them and have infringement legal standing if everything else fails. These principles would go a long way in spurring the broader use of 5G pool licensing for a more efficient, straightforward, and predictable IoT licensing environment.     

An experimental test of automatic mitigation of wholesale electricity prices

In several major deregulated electricity generation markets, the market operator uses an “automatic mitigation procedure” (AMP) to attempt to suppress the exercise of market power. A leading type of AMP compares the offer price from each generation unit with a recent historical average of accepted offer prices from that same unit during periods when there was no transmission-system congestion to impede competition. If one or more units' offer prices exceed the recent historical average by more than a specified margin, and if these offer prices raise the market-clearing price by more than a specified margin, the market operator replaces the offending offer prices with lower ones. In an experiment, we test an AMP of this type. We find that it keeps market prices close to marginal cost if generation owners have low market power in uncongested periods. However, with high market power in uncongested periods, a condition that may apply in many parts of the world, the generation owners are able to gradually raise the market price well above short-run marginal cost in spite of the AMP. We also test the effect of the AMP on the frequency with which high-variable-cost units are used, inefficiently, in place of low-variable-cost units.     

资本市场压力与企业策略性专利行为:卖空机制的视角

创新是一种不确定性高且周期长的投资活动,需要风险偏好更大、对失败容忍更高的市场环境,而资本市场具有筛选和发现创新型企业、有效分散创新风险的功能,因而对创新活动起着关键作用。然而,中国资本市场短期投资者比例高,融券交易成本高且交易不活跃,加上专利评价体系对不同质量的专利区分度较低,导致资本市场压力对创新活动没有发挥出信息机制和治理机制两种效应。相反,资本市场压力带来的负面信息表达渠道和管理层短期业绩压力,造成了中国专利申请中存在“重数量、轻质量”“重申请、轻维护”的企业策略性专利行为所衍生的“专利泡沫”问题。本文采用中国融资融券制度作为准自然实验,考察卖空机制对企业创新的影响效应和作用机理。研究发现,企业面临卖空压力时会更加积极地申请专利,但专利的申请质量有所下降,表现为专利授权率降低;专利结构有所恶化,最终授权数增加的主要是容易研发、授权快的实用新型专利和外观设计专利;专利得到授权后,企业放弃缴纳维持费用以终止专利权。这些策略性专利行为在短期内可以减少企业的卖空交易量,推高企业市值,但长期看对企业的业绩没有积极影响,是一种“创新假象”。卖空机制主要通过施压机制来影响企业创新,管理层业绩压力、外部监督压力、股价信息传递压力越大的企业,在面临卖空威慑时更有动力进行策略性专利行为。为促进企业创新向高质量发展,需要进一步完善融资融券制度和专利评价体系。     

Licensing a technology standard

I examine the optimal licensing strategy of the owner of a proprietary technology standard in a monopolistically competitive industry. The standard owner can be either an outsider inventor or a joint venture of downstream firms. I find that (1) a simple revenue royalty replicates the integrated monopoly outcome; (2) a patent pool cannot do better than adopting a non-discriminatory licensing policy that offers higher royalty rates to pool members than to nonmembers; (3) if the standard owner also sells a complementary good, then it may choose a decentralized marketplace as a commitment not to maximize licensing revenue. Implications to the use of RAND pricing in standard settings are discussed.     

Ordered search in differentiated markets

This paper presents an ordered search model in which consumers search both for price and product fitness. I construct an equilibrium in which there is price dispersion and prices rise in the order of search. The top firms in consumer search process, though charge lower prices, earn higher profits due to their larger market shares. Compared to random search, ordered search can induce all firms to charge higher prices and harm market efficiency.     

The licensing dilemma: understanding the determinants of the rate of technology licensing

The licensing of technology entails a trade‐off: licensing payments net of transaction costs (revenue effect) must be balanced against the lower price–cost margin and/or reduced market share implied by increased competition (profit dissipation effect) from the licensee. We argue that the presence of multiple technology holders, which compete in the market for technology, changes such a trade‐off and triggers more aggressive licensing behavior. To test our theory, we analyze technology licensing by large chemical firms during the period 1986–96 for 107 chemical products. We find that the rate of technology licensing displays an inverted U‐shaped relationship with the number of potential technology suppliers and is negatively related to the licensor's market share and to the degree of technology‐specific product differentiation. Copyright © 2006 John Wiley & Sons, Ltd.     

Commodity price inflation, retail pass-through and market power

When commodity prices rise, wholesalers and retailers of products derived from basic commodities respond by passing along at least a portion of the price increase to consumers. In this paper we examine whether firms respond differently to positive commodity price shocks than to negative commodity price shocks; that is, whether commodity price volatility alters market power. We exploit recent volatility in food commodity prices over the period 2007-2010 to investigate how commodity price shocks translate into market power in two different vertically-structured food product industries: potatoes and fluid milk. For potatoes, we find both wholesale and retail market power decreases (increases) during periods of rising (falling) commodity prices. Moreover, price-cost margins widen a substantially greater degree in response to negative shocks than margins narrow in response to positive shocks, indicating that commodity price volatility increases market power. For fluid milk, we find that market power likewise declines during periods of rising commodity prices; however, market power does not significantly change during periods of falling commodity prices, suggesting that commodity price volatility decreases market power.     

“To Own or Not to Own?” A Study on the Determinants and Consequences of Alternative Intellectual Property Rights Arrangements in Crowdsourcing for Innovation Contests

Firms are increasingly engaging in crowdsourcing for innovation to access new knowledge beyond their boundaries; however, scholars are no closer to understanding what guides seeker firms in deciding the level at which to acquire rights from solvers and the effect that this decision has on the performance of crowdsourcing contests. Integrating property rights theory and the problem‐solving perspective while leveraging exploratory interviews and observations, we build a theoretical framework to examine how specific attributes of the technical problem broadcast by firms affect the seekers’ choice between alternative intellectual property rights (IPR) arrangements that call for acquiring or licensing‐in IPR from external solvers (i.e., with high and low degrees of ownership, respectively). Each technical problem differs in the knowledge required to be solved as well as in the stage of development of the innovation process and seeker firms pay great attention to such characteristics when deciding about the IPR arrangement they choose for their contests. In addition, we analyze how this choice between acquiring and licensing‐in IPR, in turn, influences the performance of the contest. We empirically test our hypotheses analyzing a unique dataset of 729 challenges broadcast on the InnoCentive platform from 2010 to 2016. Our results indicate that challenges related to technical problems in later stages of the innovation process are positively related to the seekers’ preference toward IPR arrangements with a high level of ownership, while technical problems involving a higher number of knowledge domains are not. Moreover, we found that IPR arrangements with a high level of ownership negatively affect solvers’ participation and that IPR arrangement play a mediating role between the attributes of the technical problem and the solvers’ self‐selection process. Our paper contributes to the open innovation and crowdsourcing literature and provides practical implications for both managers and contest organizers.     

Legal unbundling can be a golden mean between vertical integration and ownership separation

We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means in our model that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling never yields lower quantities in the downstream market than ownership separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.