© suzanne scotchmer 2007 from innovation and incentives licensing some terms: exclusive exclusive...

© Suzanne Scotchmer 2007 from Innovation and Incentives

Licensing

• Some Terms:Exclusive

Exclusive licensing versus exclusive dealing

Royalties versus Fixed FeesPro-competitive, anticompetitiveMerger

Complements versus Substitutes


• The Pro-Competitive Uses of Licensing (efficiency)

1. Production Efficiencies & Information Sharing

2. Follow-on Innovation

3. Develop complementary products• Basic Antitrust Concern: preserve competition. How

does this fit with IP, which grants market power?• Sherman Act:

Section 1: prohibits acts in restraint of trade

(requires 2 parties or more)

Section 2: prohibits attempts to monopolize

(applies to single actors)• Basic law: “rule of reason” : efficiency vs monopoly• 1995 Antitrust Guidelines


Production Efficiencies

marginal revenue

c(q) (q)

qd(p)

p*

q* q

qd(p)

p = c

p = c

p*

q

New products: How can the proprietor achieve the monopoly price?

Cost reducing Innovations:What will be the consequenceof licensing? Are there any dangers here?


Developing Follow-On Products:We already discussed this

Developing Complementary Products

We will discuss this later in Chapter 10


Inefficiencies: Reducing the Rate of Progress(Mergers and Anticompetitive Licensing)

• Suppose the patent value supports the efficient amount of entry into a race. What will happen if the firms make an agreement?

• How does this depend on the possibility of unlicensed entry?

• General Point: Free entry mitigates harm from agreements. Why?

(n)S

number of firms n

Free entry outcome is optimal when winner receives value (v)

n*=2

cn

(n)(v)

n=1


• Chiron patented the genetic code for Hepatitus C virus.

• Eli Lilly and Merck, as well as Chiron, would like to use the gene sequence to develop a vaccine or therapy.

• Does Chiron have a legal right to withhold license? (yes)

• If Chiron could develop the vaccine, might it license anyway? Why?

• Compare the outcomes, in terms of efficiency, if– Chiron gave an exclusive license

– Chiron gave a nonexclusive license

– Merck & EliLilly could develop mutually noninfringing vaccines.

• Evaluate: With the Chiron patent, the therapy will not be achieved as fast or as certainly as with no patent (see above diagram)

• Would the vaccine be more efficiently developed if the genetic code was in the public domain?

The Cumulative Context: An example


Patent Pools:• Substitutes:

Infringing: Airplanes --Glenn Curtis’ patents infringed the Wright brothers, who would not license.

Noninfringing -- what is the danger?

• Blocking Patents: the VISX/Summit Pool

• Complements

Prices may be lower with patent pools, as discussed in Cumulative Innovation


pa

ph

p1

w(n)

n*/2 n*-1 n nF

} cn

Collective Rights Management Organizations


Collective Rights Management

• In the above diagram, compare: Individual negotiationFree entryShared profit at the optimal number of creatorsThe ability of the cartel to exclude artists

• Are ASCAP and BMI threats to competition?Are they collusion? How should they be governed?


Licensing versus Sale• Patented objects and copyrighted books are

usually sold, not licensed.

• The right to use the “template” is usually licensed.

• This is changing in copyright industries, where you now license the right to use software rather than buying the CD with no restrictions.

• Main consequence: Licensing allows restrictions. What should we make of this?

© suzanne scotchmer 2007 from innovation and incentives licensing some terms: exclusive exclusive...

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