Optimal Cross-Licensing Arrangements: Collusion versus Entry Deterrence

Jay Choi and Heiko Gerlach

No 7151, CESifo Working Paper Series from CESifo

Abstract: This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.

Keywords: cross-licensing arrangements; patent litigation; collusion; entry deterrence (search for similar items in EconPapers)
JEL-codes: D43 L13 O30 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-bec, nep-com, nep-ipr, nep-law and nep-mic
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Related works:
Journal Article: Optimal cross-licensing arrangements: Collusion versus entry deterrence (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7151

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