Gerard Llobet

Rewarding Sequential Innovators: Prizes, Patents and Buyouts

This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract.

Financing and the Protection of Innovators

The protection that innovators obtain through intellectual property rights crucially depends on their incentives and ability to litigate infringers. Taking patents as a notable example, we study how the financing of legal costs can alter the incentives to litigate in defense of a patent and, thus, the prospects of infringement and the effective protection of the innovator. We compare the resort to a financier once the infringement has occurred (ex-post financing) with patent litigation insurance (PLI) as well as other ex-ante arrangements based on leverage. We show that the ex-ante arrangements can be designed (for instance, in the case of PLI, by including an appropriate deductible) so as to implement the innovators second-best outcome: a situation in which patent predation is deterred without inducing excessive litigation.

The Optimal Scope of the Royalty Base in Patent Licensing

Legal scholars debate the merits of using the total value of the product, as opposed to the value of the component to which the technology contributes, as the base for a royalty in licensing contracts. In this paper we make use of the fact that these two royalty bases are equivalent to using ad valorem and per-unit royalties, respectively. We abstract from implementation and practicability considerations to analyze the welfare implications of the two rules. Ad valorem royalties tend to lead to lower prices, particularly in the context of successive monopolies. They benefit upstream innovators and do not necessarily hurt downstream producers. This benefit increases when there are multiple innovators contributing complementary technologies, as is typical of standard-setting organizations. Ad valorem royalties are even more desirable when enticing upstream investment is optimal. Our findings explain why most licensing contracts include royalties based on the value of the product.

REGULATION AND OPPORTUNISM: HOW MUCH ACTIVISM DO WE NEED?

This paper analyzes the current trend towards firms’ self-regulation as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market(conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an inefficiently higher externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.

Payments and Participation: The Incentives to Join Cooperative Standard Setting Efforts: Incentives to Join Cooperative Standard Setting

Formal, cooperative standard setting continues to grow in importance for the global economy. And as standards become more pervasive, the stakes rise for all participants. It is not surprising then that many standards are covered by intellectual property rights, that battles over the licensing of those rights have reached a fevered pitch in several industries, and that competition agencies around the globe are seriously weighing whether and how to intervene in the standard setting process. One suggestion for such an intervention is the imposition of a licensing cap, referred to as the incremental value rule. We evaluate this proposal and find that even in contexts where this rule is efficient from an ex�?post point of view, it induces important distortions in the decisions of firms to innovate and participate in standard setting organizations (SSO). Such a rule reduces the R&D investment that a firm makes in relevant technologies and lowers the probability that it will join the SSO. We characterize a variation of the incremental value rule for defining fair, reasonable, and nondiscriminatory that accounts for both investment and participation incentives.

Patent Litigation and the Role of Enforcement Insurance

Abstract We study the effects of patent enforcement insurance when used by an incumbent patent holder in order to increase its incentives to oppose alleged infringers (entrants). By covering some of the legal costs ex-ante, the incumbent can increase its commitment to litigate and, as a result, deter some potential entrants and, in case of entry, induce a more profitable settlement deal. We identify the circumstances in which it is optimal for the incumbent to undertake patent enforcement insurance, typically with a deductible that either prevents litigation from occurring in equilibrium or trades off the ex-post costs of excessive litigation with the aforementioned strategic gains. We assess the impact of patent enforcement insurance on equilibrium outcomes across different legal-cost allocation rules and parameterizations of the model.

Advances in Economics and Econometrics: Mechanisms for Allocation and Decentralization of Patent Rights

We trace the development of the literature on the allocation of patent rights from early models of patent length through modern models of cumulative innovation by many innovators. A common useful theme is describing policies in terms of patent duration. We use one framework for considering a variety of papers in the literature, and describe how duration promises can be used as a state variable in constructing optimal allocations in dynamic problems. We tie this long standing literature into a more recent literature using a mechanism design approach to study the reward of innovation under asymmetric information. Decentralization in models of sequential innovation generates a system that incorporates self-enforcement as a requirement of the optimal policy. One interpretation of the decentralization of rights between competing innovators is as a system of mandatory buyouts paid between innovators. ∗Prepared for the Econometric Society World Congress Volume †UCLA ‡CEMFI §Rotman School of Management, University of Toronto.

The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents

It has been commonly argued that the decision of a large number of inventors to license complementary patents necessary for the development of a product leads to excessively large royalties. This well-known Cournot-complements or royalty-stacking effect would hurt efficiency and downstream competition. In this paper we show that when we consider patent litigation and introduce heterogeneity in the portfolio of different firms these results change substantially due to what we denote the Inverse Cournot effect. We show that the lower the total royalty that a downstream producer pays, the lower the royalty that patent holders restricted by the threat of litigation of downstream producers will charge. This effect generates a moderation force in the royalty that unconstrained large patent holders will charge that may overturn some of the standard predictions in the literature. Interestingly, though, this effect can be less relevant when all patent portfolios are weak making royalty stacking more important.

Renewable Entry in Liberalized Electricity Markets: Implications for Policy Design

Electricity generation from renewable energy sources is growing rapidly. This has resulted in lower wholesale electricity prices, but has also reduced the use of conventional generation technologies, such as coal and gas, because renewable energy generally has lower running costs. Declining demand, lower prices and lower utilisation rates have all reduced the profitability of conventional electricity generation. At the same time, flexible conventional technologies continue to play a very important role: the growing share of renewable energy sources like wind and solar energy, the output of which varies with weather conditions and from daytime to night time, requires flexible energy systems, including reliable back-up capacity, that can take the form of conventional generation, demand-response or storage, to ensure security of supply at all times.

Preventing Patent Hold Up: An Economic Assessment of Ex Ante Licensing Negotiations in Standard Setting

The quote in the title refers to a recurring principle in the Antitrust Guidelines for the Licensing of Intellectual Property, issued jointly by the US Department of Justice and the Federal Trade Commission in 1995. That report states that The Agencies general approach in analyzing a licensing restraint under the rule of reason is to inquire whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects. We apply this standard of evaluation to recent proposals for joint licensing negotiations in standard setting contexts, which have been offered as a solution to the problem of opportunistic licensing and patent hold up. We find that, to the contrary, joint negotiations are not reasonably necessary to prevent hold up. Instead, other more moderate policy solutions that take advantage of existing institutional features within standard setting bodies have a greater likelihood of preventing hold up without running the risk of anticompetitive licensee collusion that is present with joint negotiations. In particular, we posit that standard setting bodies should set voting rules to obtain majority support in the selection of technologies for a standard and should consider means of encouraging ex ante bilateral negotiations. In addition, competition authorities could focus on the enforcement of non-discriminatory licensing as a means of preventing anticompetitive opportunistic hold up.