When do strategic alliances inhibit innovation by firms? Evidence from patent pools in the global optical disc industry

Research and development (R&D) consortia are specialized strategic alliances that shape the direction and scope of firm innovation activities. Little research exists on the performance consequences of participating in R&D consortia. We study the effect of patent pools, a unique form of R&D consortia, on firm performance in innovation. While prior research on alliances generally implies that patent pools enhance firm innovation, our study finds the opposite. Analyzing data on systemic innovation in the global optical disc industry, we find that patent pool formation substantially and significantly decreases both the quantity and quality of patents subsequently generated by licensors and licensees relative to the patenting activity of nonparticipants. Our empirical findings suggest that patent pools actually inhibit, rather than enhance, systemic innovation by participating firms. Copyright © 2011 John Wiley & Sons, Ltd.     

Patents and pools in pyramidal innovation structures

We study sequential innovation in two pyramidal structures, in which patent pools are socially desirable. Patent pools are stable, in a regular pyramid structure but not in an inverse pyramid structure under a standard pool formation process. We propose a more elaborate formation protocol that allows for the creation and stability of the largest possible pool. We also examine the welfare implications of introducing patent protection in both structures. Patent protection increases the likelihood of innovation as the pyramid becomes wider in the regular pyramid structure while patent protection always decreases the likelihood of innovation in the inverse pyramid structure.     

To join or not to join: Examining patent pool participation and rent sharing rules

In recognition that participation in modern patent pools is voluntary, we present empirical evidence on participation rates and the factors that drive the decision to join a pool, including the profit sharing rules adopted by the pool's founders. In most participation contexts, the at-risk group is extremely difficult, if not impossible, to identify. For pools centered on technologies that result from a standard-setting process, in contrast, we are able to identify a relatively unambiguous population of patents eligible for inclusion but that have not been included in the pool. We find that vertically integrated firms, with patents and downstream operations, are more likely to join a patent pool and among those firms that do join, those with relatively symmetric patent contributions (in terms of value) to a standard appear more likely to accept numeric patent share rules for dividing royalty earnings.     

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.     

Vertical Structure and Patent Pools

It is well known that patent pools can enhance efficiency by eliminating the complements problem. This paper investigates how the presence of vertically integrated firms affects the economic impact of a patent pool. Without a patent pool, the presence of integrated firms may either increase or decrease the final product price as there are two countervailing effects – reduced double marginalization and raising rivals costs. However, when there is a patent pool, vertical integration always lowers the final product price. In conclusion, the economic efficiency arguments for patent pools are enhanced when some firms are vertically integrated.     

专利联盟:战略联盟研究的新领域

专利联盟是基于专利许可而组成的一种战略联盟形式。本文在对专利联盟相关概念和对美国专利联盟历史回顾的基础上，从专利垄断、交易成本和资源基础理论等角度，综述了专利联盟的理论研究及其研究中存在的不足。本文指出，加强专利联盟的研究对于正处在技术追赶阶段的我国企业参与全球竞争具有十分重要的现实意义。     

‘Essential’ Patents,FRAND Royalties and Technological Standards

Standard Setting Organizations have developed FRAND agreements in order to prevent firms from holding up other participants once a standard is created. We analyze here the consequences of such agreements—in particular the requirements of fairness and non-discrimination—for the creation of technological standards that require the participation of existing patent holders. 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, as is implicitly the case in FRAND agreements, private information about the quality of patents leads to a variety of distortions, in particular the incentives of firms to ‘pad’ by contributing patents that are ‘inessential’ for the given standard, a phenomenon that seems to be widespread. Several results emerge from the analysis: (i) the number of inessential patents co-varies positively with the number of essential patents; (ii) there is over-investment relative to the second-best, that is when padding cannot be avoided and (iii) the threat of disputes reduces incentives to pad but at the cost of lower production of strong patents; (iv) mitigating this undesirable side-effect calls for a simultaneous increase in the cost of padding, through a better filtering of patent applications.     

Innovating standards through informal consortia: The case of wireless telecommunications

We empirically examine the effects of industry consortia on the coordination of innovation strategies of the members. Our analyses utilize membership data from 32 consortia in wireless telecommunication technology subfields from 2000 to 2005 and prior art citations in standard-essential patents. We find that connections among firms in informal and technically-oriented consortia significantly increase the likelihood that firms cite each other's patents in subsequent patents essential for the UMTS wireless telecommunication standard. Inventions that are likely to become part of the UMTS system tend to build on inventions by firm peers who were members of the same consortia, controlling for patent or firm fixed effects, technology class, and other characteristics. Consortia may enhance productivity of invention and increase the incentives to invest in R&D by internalizing potential externalities. They may also enhance efficiency of standardization by facilitating the interaction of committee and market processes. Consortia thus structure and constrain the process of innovating standardized technologies. This is problematic if consortia are not truly accessible for all the relevant parties. Policymakers thus need to balance these effects. For managers, the results show that participation in a variety of technical consortia enables influencing peers' innovation strategies related to compatibility standards.     

How many patents does it take to signal innovation quality?

In this paper, we offer a novel explanation to the surge in patenting observed during the last few years. When PTOs (Patent and Trademark Offices) award bad patents, not only do “false innovators” have the incentive to file applications but also, and more interestingly, “true innovators” are forced to patent more intensively in an attempt to signal their type. However, if they are liquidity constrained, true innovators may fail to separate and this fact reduces the incentives to exert effort in R&D. In addition, drawing on the signaling role of patents highlighted by the model, we investigate some of the proposals that have been put forward in order to mitigate the bad patent problem. We provide an intuitive condition under which a tightening of the patentability standards (“raising the bar”) reduces the distortions caused by bad patents. Moreover, we show that introducing a two-tiered patent system is unlikely to improve market outcomes.     

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.     

BREAKING THE SILOS: DISTRIBUTED KNOWLEDGE AND STRATEGIC RESPONSES TO VOLATILE EXCHANGE RATES

A model of effective decision-making in a situation of distributed knowledge is developed, drawing on three perspectives: the sociocognitive perspective, which focuses on framing issues; the economic perspective, which focuses on the role played by incentives in the integration of knowledge and decision-making authority; and the process perspective, which stresses the role of integrating mechanisms and of processes that either hinder or foster risk awareness and flexibility. The model is tested on a sample of managers from different functional areas of Fortune500 firms, using strategic responses to exchange-rate volatility as the context. The results show that all three perspectives—framing, incentives and process—are significant in explaining the effectiveness of strategic responses to volatile exchange rates. The findings suggest that simultaneously addressing managerial mindsets, incentives and process may be crucial to generating effective strategic responses across functions.     

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.     

Strategic Investment under Open Access: Theory and Evidence

We examine the incentives of access‐regulated firms to invest in infrastructure facilities they must share with competitors. We show that investment incentives can be decomposed into a non‐strategic and a strategic part. The non‐strategic part implies that investment depends positively on market size. The strategic incentives imply that investment also depends on market composition, namely, the market shares of the facility owner and its competitors. Using a dataset of regulated electric utilities in the United States, we find evidence that transmission investments are indeed made strategically. Ceteris paribus, utilities are less likely to invest, and investment levels are lower, when competitors occupy a larger share of the market.     

Standards,consortia, and innovation

The development of formal ICT standards is a challenging form of collaborative innovation, combining consensus decision making and R&D rivalry. To supplement this formal standard setting process, it has thus become frequent that part of the involved firms creates ad hoc consortia to better align positions on a common technology roadmap. This paper aims to assess whether such consortia can effectively mitigate R&D coordination failure through enhanced cooperation. We first develop a theoretical model showing that depending on the nature of firms' incentives to contribute proprietary technology, different types of R&D coordination failure – namely a Public Good or Rent Seeking problem – may occur in equilibrium. Using a large panel of standards, we then confirm empirically the prediction that consortia have different effects on innovation under a Public Good or Rent Seeking regime. Overall, we observe an increase in innovation after a firm joined a consortium. However, this effect is significantly weakened or even reversed for standards characterized by a strong Rent Seeking regime.     

Platform competition with complementary products

We characterize the pricing structure in a model of platform competition in which two firms offer horizontally differentiated platforms and two sets of complementors offer products that are exclusive to each platform, respectively. We highlight the presence of indirect network effects: platforms and complementors benefit from the quality and number of firms in their group and suffer from the quality and number of firms in the rival’s group through their effects on prices and market share. We then determine the incentives of platforms to subsidize the independent complementors in an equilibrium. We further analyze the incentives of each platform to form a strategic alliance with complementors through contractual exclusivity or technological compatibility, or to integrate with the complementors. Finally, we discuss the welfare consequences of these strategies.     

PATENT DAMAGES AND SPATIAL COMPETITION*

We analyze price competition between a spatially differentiated product patentee and an imitator anticipating probabilistic future patent damages. We compare the performance of three damage regimes. The ‘reasonable royalty’ regime, which yields symmetric equilibrium pricing, maximizes static welfare and yields the highest innovation incentives when patent enforcement is nearly certain. The ‘lost profits’ regime, which may deter infringement, yields the highest innovation incentives when patent enforcement is less‐than‐certain and products are sufficiently valuable. The ‘unjust enrichment’ regime yields low static efficiency and low innovation incentives. We offer new insights into the ‘hypothetical negotiation’ that courts use to construct reasonable royalties.     

Grantbacks,territorial restraints,and innovation

We analyse the effect of grantback clauses in licensing contracts. While competition authorities fear that grantback clauses might decrease the licensee's ex post incentives to innovate, a standard defence is that grantback clauses are required for the patent-owner to agree to license its technology in the first place. We examine the validity of this “but for” defence and the equilibrium effect of grantback clauses on the innovation incentives of the licensee for both non-severable and severable innovations, which roughly correspond to infringing and non-infringing innovations. We show that grantback clauses do not increase the patent-holder's incentives to license when non-severable innovations are at stake but they do when severable innovations are concerned – suggesting that the “but for” defence might be valid for severable innovations but not for non-severable ones, in direct contradiction to regulation in some jurisdictions. Moreover we show that, for severable innovations, grantback clauses can increase the range of parameters for which follow-on innovation by the licensee occurs. Our work extends the large literature on sequential innovation to an environment where information diffuses through licensing rather than through the mere act of patenting. In this different informational set up we show that Green and Scotchmer (1995)’s conclusion that the initial innovator should have a patent of infinite breadth no longer holds.     

Evolving technologies and standards regulation

The EU mandated a single standard for second generation wireless telecommunications, whereas the US allowed several incompatible standards to battle for market share. Motivated by this example, we argue that a single standard leads to a free riding problem, and thus to a significant decrease in marginal incentives for R&D investment. In this context, keeping two separate standards may be a necessary evil to sustain a high level of R&D expenditures. We also provide conditions such that a non-standardization equilibrium is better for consumers and for society as a whole.     

Policy orientations and technology choices in standards wars

Standard-setting organizations (SSOs) exhibit a variety of policy orientations toward the conflicting interests of technology developers and adopters. In this paper, we analyze a model that incorporates the technology choices of SSOs in standards wars and royalty determinations made by the developers of essential technologies. We show that both policy orientations toward developers relative to adopters and coordinated standard setting by SSOs that issue competing standards may result in a more-than-optimal number of essential technologies. Furthermore, we examine how SSOs’ technology choices may be affected by both network effects in standard adoption and coalition formation among developers.