'Essential' patents, FRAND royalties and technological standards

Mathias Dewatripont and Patrick Legros

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: 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. © 2013 The Editorial Board of The Journal of Industrial Economics and John Wiley & Sons Ltd.

Date: 2013-12
Note: SCOPUS: ar.j
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Citations: View citations in EconPapers (14)

Published in: Journal of industrial economics (2013) v.61 n° 4,p.913-937

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Related works:
Journal Article: ‘Essential’ Patents, FRAND Royalties and Technological Standards (2013)
Working Paper: 'Essential' Patents, FRAND Royalties and Technological Standards (2008)
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