The Dynamic Innovation Implications of Licensing Patents under an Incremental Value Rule
Published online by Cambridge University Press: 05 June 2012
A number of recent policy papers have called for patents to be priced according to a so-called incremental value rule, where licensing fees would be restricted to the value the patent adds as compared to licensees' next best alternative. Incremental value pricing is a common approach for physical goods and services, but intellectual property is different in a number of important ways. We evaluate the proposal to cap licensing fees at the incremental value of the patent. We find that while the incremental value rule has intuitive appeal, it is based on ex post reasoning in that it relies on the presumption that all needed innovations have already been developed. We consider the dynamic implications of the innovation process, assessing how the imposition of an incremental value licensing cap would impact a firm's decisions to invest in R&D and, when relevant, to participate in cooperative standard-setting efforts. Shifting the analysis to fully ex ante, before either licensors or licensees have made any irreversible investments, we find imposing an incremental value cap on licensing fees would lower R&D investments among innovators, it would lower SSO participation rates among patent holders, and it would even lower aggregate earnings for SSO members as a whole.
Introduction
A fundamental result in economics is that a firm facing competition for a particular product will be able to charge at most the incremental value that the product offers to customers over the next best alternative.
To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
Find out more about the Kindle Personal Document Service.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.