Anticompetitive vertical mergers waves

This paper develops an equilibrium model of vertical mergers. We show that competition on an upstream market between integrated firms only is less intense than in the presence of unintegrated upstream firms. Indeed, when an integrated firm supplies the upstream market, it becomes a soft downstream competitor to preserve its upstream profits. This benefits other integrated firms, which may therefore choose not to cut prices on the upstream market. This mechanism generates waves of vertical mergers in which every upstream firm integrates with a downstream firm, and the remaining unintegrated downstream firms obtain the input at a high upstream price. We show that these anticompetitive vertical mergers waves are more likely when downstream competition is fiercer.

Anticompetitive vertical mergers waves

This paper develops an equilibrium model of vertical mergers. We show that competition on an upstream market between integrated firms only is less intense than in the presence of unintegrated upstream firms. Indeed, when an integrated firm supplies the upstream market, it becomes a soft downstream competitor to preserve its upstream profits. This benefits other integrated firms, which may therefore choose not to cut prices on the upstream market. This mechanism generates waves of vertical mergers in which every upstream firm integrates with a downstream firm, and the remaining unintegrated downstream firms obtain the input at a high upstream price. We show that these anticompetitive vertical mergers waves are more likely when downstream competition is fiercer

Abuse of Dominance and Licensing of Intellectual Property

We examine the impact of the licensing policies of one or more upstream owners of essential intellectual property (IP hereafter) on the variety offered by a downstream industry, as well as on consumers and social welfare. When an upstream monopoly owner of essential IP increases the number of licenses, it enhances product variety, adding to consumer value, but it also intensifies downstream competition, and thus dissipates profits. As a result, the upstream IP monopoly may want to provide too many or too few licenses, relatively to what maximizes consumer surplus or social welfare.\ud With multiple owners of essential IP, royalty stacking increases aggregate licensing fees and thus tends to limit the number of licensees, which can also reduce downstream prices for consumers. We characterize the conditions under which these reductions in downstream prices and variety is beneficial to consumers or society

Decreasing returns, patent licensing and price-reducing taxes

This paper proposes simple tax policies that can alleviate the distortive effects of royalties. We consider a Cournot duopoly under decreasing returns where one of the firms has a patented technology that it can license to its rival using combinations of royalties and fixed fees. Under optimal licensing policies for the patentee, stronger diseconomies of scale result in lower market prices. It is possible to construct tax-transfer schemes for the firms that are Pareto improving as well as deficit neutral, i.e., these taxes lower market prices and collect sufficient revenue to compensate firms for their losses from taxation without incurring any deficit

Abuse of Dominance and Licensing of Intellectual Property

We examine the impact of the licensing policies of one or more upstream owners of essential intellectual property (IP hereafter) on the variety offered by a downstream industry, as well as on consumers and social welfare. When an upstream monopoly owner of essential IP increases the number of licenses, it enhances product variety, adding to consumer value, but it also intensifies downstream competition, and thus dissipates profits. As a result, the upstream IP monopoly may want to provide too many or too few licenses, relatively to what maximizes consumer surplus or social welfare. With multiple owners of essential IP, royalty stacking increases aggregate licensing fees and thus tends to limit the number of licensees, which can also reduce downstream prices for consumers. We characterize the conditions under which these reductions in downstream prices and variety is beneficial to consumers or society

Decreasing returns, patent licensing and price-reducing taxes

This paper proposes simple tax policies that can alleviate the distortive effects of royalties. We consider a Cournot duopoly under decreasing returns where one of the firms has a patented technology that it can license to its rival using combinations of royalties and fixed fees. Under optimal licensing policies for the patentee, stronger diseconomies of scale result in lower market prices. It is possible to construct tax-transfer schemes for the firms that are Pareto improving as well as deficit neutral, i.e., these taxes lower market prices and collect sufficient revenue to compensate firms for their losses from taxation without incurring any deficit

Abuse of Dominance and Licensing of Intellectual Property

Patent thickets, layers of licenses a firm needs to be able to offer products that embody technologies owned by multiple firms, and licensing policies have drawn increasing scrutiny from policy makers. Patent thickets involve complementary products, which gives rise to double marginalization -- the so-called royalty stacking problem -- and has the potential to retard diffusion of new technologies and reduce consumer welfare. This paper examines the impact of licensing policies of one or more upstream owners essential} intellectual property (IP) on the downstream firms that require access to that IP. The terms under which downstream firms can access this IP affects entry decisions, product diversity, prices and welfare. We consider both the case in which a single party controls the essential IP and the case in which different parties control complementary pieces of essential IP. We compare the outcome of several alternative standard licensing arrangements, such as flat rate access fees, royalty percentages, per unit fees, patent pools and cross-licensing arrangements, with or without vertical integration. We first consider the case where there is a single upstream owner of essential IP. Increasing the number of licenses enhances product variety, which creates added value, but it also intensifies downstream competition, which dissipates profits. We derive conditions under which the upstream IP monopoly will then want to provide an excessive or insufficient number of licenses, relative to the number that maximizes consumer surplus or social welfare. When there are multiple owners of essential IP, royalty stacking can reduce the number of the downstream licensees, but also the downstream equilibrium prices the consumers face. The paper derives conditions determining whether this reduction in downstream price and variety is beneficial to consumers or society. Finally, the paper explores the impact of alternative licensing policies. With fixed license fees or royalties expressed as a percentage of the price, an upstream IP owner cannot control the intensity of downstream competition. In contrast, volume-based license fees (i.e., per-unit access fees), do permit an upstream owner to control downstream competition and to replicate the outcome of complete integration. The paper also shows that vertical integration can have little impact on downstream competition and licensing terms when IP owners charge fixed or volume-based access fees

Abuse of Dominance and Licensing of Intellectual Property

Patent thickets, layers of licenses a firm needs to be able to offer products that embody technologies owned by multiple firms, and licensing policies have drawn increasing scrutiny from policy makers. Patent thickets involve complementary products, which gives rise to double marginalization -- the so-called royalty stacking problem -- and has the potential to retard diffusion of new technologies and reduce consumer welfare. This paper examines the impact of licensing policies of one or more upstream owners essential} intellectual property (IP) on the downstream firms that require access to that IP. The terms under which downstream firms can access this IP affects entry decisions, product diversity, prices and welfare. We consider both the case in which a single party controls the essential IP and the case in which different parties control complementary pieces of essential IP. We compare the outcome of several alternative standard licensing arrangements, such as flat rate access fees, royalty percentages, per unit fees, patent pools and cross-licensing arrangements, with or without vertical integration. We first consider the case where there is a single upstream owner of essential IP. Increasing the number of licenses enhances product variety, which creates added value, but it also intensifies downstream competition, which dissipates profits. We derive conditions under which the upstream IP monopoly will then want to provide an excessive or insufficient number of licenses, relative to the number that maximizes consumer surplus or social welfare. When there are multiple owners of essential IP, royalty stacking can reduce the number of the downstream licensees, but also the downstream equilibrium prices the consumers face. The paper derives conditions determining whether this reduction in downstream price and variety is beneficial to consumers or society. Finally, the paper explores the impact of alternative licensing policies. With fixed license fees or royalties expressed as a percentage of the price, an upstream IP owner cannot control the intensity of downstream competition. In contrast, volume-based license fees (i.e., per-unit access fees), do permit an upstream owner to control downstream competition and to replicate the outcome of complete integration. The paper also shows that vertical integration can have little impact on downstream competition and licensing terms when IP owners charge fixed or volume-based access fees

Essays on intellectual property rights policy

This dissertation will take a theoretical approach to analyzing certain challenges in the design of intellectual property rights (`IPR') policy. The first essay looks the advisability of introducing IPR into a market which is currently only very lightly protected - the US fashion industry. The proposed Innovative Design Protection and Piracy Prevention Act is intended to introduce EU standards into the US. Using a sequential, 2-firm, vertical differentiation framework, I analyze the effects of protection on investment in innovative designs by high-quality (`designer') and lower-quality (`mass-market') firms when the mass-marketer may opt to imitate, consumers prefer trendsetting designs and firms compete in prices. I show that design protection, by transforming mass-marketers from imitators to innovators, may reduce both designer pro ts and welfare. The model provides possible explanations for the dearth of EU case law and the increase in designer/mass-marketer collaborations. The second essay contributes to the literature on patent design and fee shifting, contrasting the effects of the American (or `each party pays') rule and English (or `losing party pays') rule of legal cost allocation on optimal patent breadth when innovation is sequential and firms are differentiated duopolists. I show that if litigation spending is endogenous, the American rule may induce broader patents and a higher probability of infringement than the English rule if R&D costs are sufficiently low. If, however, R&D costs are moderate, the ranking is reversed and it is the English rule that leads to broader patents. Neither rule supports lower patent breadth than the other over the entire parameter space. As such, any attempts to reform the US patent system by narrowing patents must carefully weigh the impact on firms' legal spending decisions if policymakers do not wish to adversely affect investment incentives. The third and final essay analyzes the effects of corporate structure on licensing behaviour. Policymakers and legal scholars are concerned about the potential for an Anticommons, an underuse of early stage research tools to produce complex final products, typically arising from either blocking or stacking. I use a simple, one-period differentiated duopoly model to show that if patentees have flexibility in corporate structure, Anticommons problems are greatly reduced. The model suggests that if the patentee owns the single (or single set) of essential IPR and goods are of symmetric quality, Anticommons issues may be entirely eliminated, as the patentee will always license, simply shifting its corporate structure depending on the identity of the downstream competitor. If the rival produces a more valuable good, Anticommons problems are reduced. Further, if the patentee holds 1 of 2 essential patents, the ability to shift its corporate structure may reduce total licensing costs to rival firms. However the analysis offers a cautionary note: while spin-offs by the patentee help to sustain downstream competition, they may restrict market output, and therefore welfare. Thus the inefficiency in the patent system may be in the opposite direction than is currently thought - there may be too much technology transfer, rather than too little