how antitrust can spur innovation: bell labs and the 1956 ... · how antitrust can spur innovation:...
TRANSCRIPT
How antitrust can spur innovation: Bell Labs andthe 1956 consent decree
Martin Watzinger, Thomas Fackler, Markus Nagler and Monika Schnitzer∗
October 14, 2016Abstract
We study whether patents prevent follow-on innovations and if so whether antitrust measuressuch as compulsory licensing can provide an effective remedy. For this purpose, we analyzethe 1956 consent decree which settled an antitrust suit against the Bell System. It allowedthe Bell System to remain the monopolist in telecommunication services, but forced it tolicense all its patents for free, including path breaking innovations such as the transistor orthe solar cell.
We can investigate the effects of compulsory licensing in isolation, without confoundingchanges in the market structure, because the consent decree was implemented without struc-tural remedies. Furthermore, due to Bell’s broad patent portfolio we can compare the effectsof compulsory licensing in markets with and without a strong incumbent.
Our study is the first to explicitly relate compulsory licensing as an antitrust measure toinnovation. We show that compulsory licensing increased follow-on innovation by 11%. Thiseffect is driven mainly by young and small firms. Our results provide robust causal evidencefor the negative effects of patents on follow-on innovation. They suggest that patents acted asbarriers to entry and that antitrust can foster innovation. We also contribute to the questionhow market structure affects innovation. We show that the increase in follow-on innovationis concentrated in fields outside of telecommunication, fields from which Bell was forced towithdraw, while there is no effect in telecommunication, where Bell remained the dominantincumbent. This suggests that compulsory licensing is an effective remedy only in marketswithout dominant incumbents.
∗Ludwig-Maximilians-University of Munich, Department of Economics, Akademiestraße 1, 80799Munich, Germany; Watzinger (corresponding author): [email protected]. Wethank Iain Cockburn, Scott Kominers, John van Reenen, Scott Stern and seminar participants atBoston University, the Frankfurt School of Finance and Management, KU Leuven, and MIT Sloan aswell as CEPR Entrepreneurship Stockholm and Applied IO London, Druid Copenhagen, and manyother conferences for helpful comments and suggestions. Fackler and Nagler gratefully acknowledge fi-nancial support by the Elite Network of Bavaria through Evidence-Based Economics. Nagler gratefullyacknowledges a scholarship for doctoral students by the DAAD. Nagler thanks the MIT Departmentof Economics and Fackler thanks NYU Stern for their hospitality while writing parts of this paper.
1 Introduction
The rationale for patents is to encourage innovation by rewarding the inventor for hisinvention. But they may actually stifle innovation when used strategically to keep outcompetitors. This concern is as old as the patent system itself: James Watt, who wasawarded the first patent for the steam engine in 1769, allegedly employed it to fend offtechnologically superior competitors, which slowed down follow-on innovation (Boldrinand Levine, 2007, Ch.1). Recently, the aggressive behavior of big technology companiesin patent disputes made headlines.1 According to The New York Times, patents areused in the technology industry as “swords” to put pressure on competitors and TheEconomist observed that “Patents should spur bursts of innovation; instead, they areused to lock in incumbents’ advantages.”2 Legal scholars have concluded that it is timeto put innovation in front and center of the antitrust policy debate (Wu, 2012; Wallerand Sag, 2014).
But is there indeed a negative effect of patents on follow-on innovation, is this ef-fect larger for dominant firms, and if so can antitrust enforcement measures such ascompulsory licensing provide an effective remedy? The answers to these questions arenot obvious. In the absence of transaction costs, the patent owner and the potentialfollow-on inventor should always be able to strike a licensing deal (Green and Scotch-mer, 1995). Yet, asymmetric information or coordination failure or the intend to blockcompetitors might get in the way (Bessen and Maskin, 2009; Galasso and Schanker-man, 2010). In particular, if the incumbent is vertically integrated she might have anincentive to block competitors with the help of intellectual property. Thus, it is anempirical question if there is an exclusionary effect of patents at all, and the literatureso far is inconclusive (Galasso and Schankerman, 2015b; Sampat and Williams, 2015).Similarly, our understanding if and how antitrust policy can solve this issue and fosterinnovation is limited. In particular, there are no empirical studies on the effect ofcompulsory licensing as an antitrust measure on innovation yet.3
1Refer for example Robert B. Reich, “Big Tech Has Become Way Too Powerful”, The New YorkTimes, Sept. 18, 2015, Page SR3; Michael Katz and Carl Shapiro “Breaking up Big Tech Would HarmConsumer”, The New York Times, Sept 28, 2015, Page A24; “The Experts: Does the Patent SystemEncourage Innovation?”, The Wall Street Journal, Max 16, 2013; Thomas Catan “When Patent,Antitrust Worlds Collide”, November 14, 2011
2Charles Duhigg and Steve Lohr “The Patent, Used as a Sword”, New York Times, Oct 7, 2012,Page A1 and “Time to fix patents”, The Economist, Aug 8, 2015
3Moser and Voena (2012) looks at the effect of compulsory licensing of German patents duringWorld War I. They find that compulsory licensing increased patenting of US companies0 in the post-war period. There set-up is different because patents were licensed because of the war and not to
1
In this paper we advance on these questions by making use of one of the most impor-tant antitrust rulings in US history: The 1956 consent decree of the Bell System. OnJanuary 24, 1956, the Federal district court in New Jersey handed down a consent de-cree obligating the Bell System, the monopolistic provider of telecommunication in US,to license all its patents for free. This decree settled a 7-year old antitrust complaintthat had charged Western Electric, the manufacturing subsidiary of the Bell System, tohave “unlawfully restrained and monopolized trade and commerce in the manufacture,distribution, sale and installation of telephone equipment." In this antitrust suit, theDepartment of Justice had sought to break-up the Bell System, separating AmericanTelephone & Telegraph, Western Electric and its research subsidiary, the Bell Labo-ratories. But in the end it had to content itself with the compulsory licensing of allexisting Bell patents as the main remedy.
At the time of the consent decree, the research subsidiary of Bell, the Bell Labora-tories, was the most innovative company in the world. Researchers at Bell Labs wereresponsible for groundbreaking innovations, such as the transistor, the solar cell, andthe basis of the cellular phone technology. But Bell also churned out a large numberof marginal innovations supporting the everyday needs of the Bell System. The caseof Bell is uniquely suited to investigate the effects of patents on follow-on innovationand of compulsory licensing as an antitrust measure for three reasons:
First, it allows us to study the effects of a removal of patents rights through compul-sory licensing in isolation, without any confounding changes in the market structure.As a result of intense lobbying of the Department of Defense, the Department of Jus-tice could not implement any structural remedies along with the compulsory licensingwhich left the market structure unchanged. This decision came as a surprise sinceBell clearly had a dominant market position and all observers agreed that structuralremedies were warranted.
Second, Bell’s broad patent portfolio allows us to measure how market structureinfluences innovation because we can compare the effect of compulsory licensing inmarkets with and without a strong incumbent. In the telecommunication market,Bell’s dominant position was not challenged by the consent decree. But around 58% ofBell’s patent portfolio was outside of the field of electric communication, due to Bell’spart in the war effort and its commitment to basic science. In these fields Bell wasnot an active market participant yet and the consent decree banned Bell from entering
correct for market power.
2
any business other than telecommunication in the future. As compulsory licensing wasapplied uniformly to all patents, this antitrust case gives us the opportunity to measurethe effect of compulsory licensing inside telecommunication where Bell remained themonopolist and in fields were Bell owned important patents but was prohibited fromentering.
Third, due to the large number of affected patents, we can precisely measure theeffect of compulsory licensing on follow-on innovation. As a consequence of the consentdecree, 7,698 patents or 1.3% of all unexpired US patents became freely available toall US companies.
Our main results are the following: Looking at average effects, we find that afterthe consent decree follow-on innovation measured by patent citations to Bell Labs’patents from other companies increased by 11% or a total of 1000 citations. This is atthe lower end of estimates for the effect of patents on follow-on innovation found in theliterature (Galasso and Schankerman, 2015b; Moser and Voena, 2012). Back-of-the-envelope calculations suggest that the resulting additional patents for other companieshad a value of up to $5.8 billion in today’s Dollars. The effect on citations is strongerfor patents of high quality than for patents of low quality. The effect is not drivenby simultaneous contemporary shocks to technologies in which Bell was active or bycitation substitution. The consent decree led to a decrease in patenting by Bell, butthis effect is not large enough to dominate the increase of patenting of other companies.This limited negative response of Bell is most likely due to the fact that at the time ofthe consent decree Bell was a regulated monopoly subject to rate of return regulation.Yet, the consent decree changed the direction of Bell’s research: Bell shifted its researchprogram to concentrate more on communication research, the only business Bell wasallowed to be active in. This is consistent with Galasso and Schankerman (2015a)who show that large companies do not reduce their innovation activity but change thedirection of their research. An in-depth case study of the transistor technology showsthat Bell had used standardized licensing and open access for the transistor technologyprior to the consent decree. The insights from this case reinforce our conclusion thatopen access to licenses was the key driver behind the effects of antitrust in the Bellcase.
Analyzing the mechanism behind the increase in follow-on innovation after com-pulsory licensing we find that more than 2/3 of the increase is driven by young andsmall companies (“start-ups”) and individual inventors unrelated to Bell. Start-ups
3
and individual inventors increase follow-on innovation by 20% while for large and oldcompanies, the increase is only around 5%. This suggests that patents act as a barrierof entry for small companies but that the market for technology licensing works rea-sonably well for large, established companies. These results are in line with Galassoand Schankerman (2015b) whose finding of increasing citations following patent in-validations is driven by citations by small companies of invalidated patents of largecompanies.
We find that entry conditions in an industry are of paramount importance for follow-on innovation: Looking across technological fields we find no effect in the technologicalfield of communication where entry was unattractive due to the dominant presence ofBell. This result is consistent with the allegation that Bell engaged in exclusionarypractices before and after the consent decree (Wu, 2012). Our study provides evidencethat antitrust policy should focus on entry conditions for start-ups and protect newentrants to increase innovation (Segal and Whinston, 2007).
Investigating the long-run impact of the consent decree shows that the scale of inno-vation increased permanently: the total number of patents increased by 15% in fieldswith compulsorily licensed patents. This increase is again driven by small and newcompanies outside of telecommunication. We do not find an increase in telecommuni-cation, indicating that market power might slow the technological progress in a field.This suggests that antitrust can have an impact on the long-run rate of technologicalchange.
The contribution of our paper is fourfold. First, we add to the literature on intel-lectual property rights by providing robust causal evidence for the negative effects ofpatents on follow-on innovation. Our analysis shows that the compulsory licensing ofBell Labs’ patents increased follow-on innovation and that this effect is driven mainlyby small start-ups. This points to patents acting as entry barriers as the most likelycause for the negative impact of the patents on follow-on innovation. Second, our studyis the first that explicitely relates compulsory licensing as an antitrust measure to inno-vation suggesting that antitrust can foster innovation by fighting exclusionary practicesand by protecting entrants. Our study shows that antitrust can increase innovation bymaking technology available to start-ups and by improving their entry conditions. Incontrast, established companies seem to be able to license technology, giving them theopportunity to build on patented technology. Thus, our study adds empirical evidenceto the theoretical arguments suggesting that to increase innovation, antitrust should
4
focus on exclusionary practices and the protection of start-ups (Segal and Whinston,2007; Baker, 2012; Wu, 2012).4 Third, we contribute to the question how entry con-ditions affects innovation. Our study shows that the increase in follow-on innovationis concentrated outside of the technological field of communication, i.e. outside thefield where Bell continued operating. This indicates that compulsory licensing is aneffective remedy to encourage follow-on innovation of market entrants only in marketswithout a dominant and vertically integrated incumbent.
Finally, our study also contributes to the understanding of the US history of in-novation in the 20th century. We substantiate and reconcile seemingly contradictoryhistorical accounts, some claiming that the 1956 Bell System consent decree increasedinnovation and spurred the growth of whole industries, others arguing that it was anan ineffective antitrust measure to reign in the market power of Bell. While the gov-ernment had declared the consent decree a “major victory”, the House Subcommitteeon Antitrust suggested that this “cozy” decree “failed the purpose of the Sherman Act”and was a “blot on the enforcement history of antitrust laws” (Antitrust Subcommit-tee, 1959, p.293). In the years after the consent decree, the Bell System faced repeatedallegations of exclusionary behavior, which eventually led to the 1974 antitrust casesthat ended with the break-up of the Bell System in 1983. Our study implies that Bell’strouble with the antitrust authorities was well earned: Bell was able to prevent newcompanies from entering and innovating in the telecommunication market, possiblyretarding technological progress such as the development of mobile phones.
Outside of the field of telecommunication, however, our analysis affirms historicalaccounts that the consent decree was enormously important for US post-war innovationas it led to a long-lasting increase in follow-on innovation of start-ups. Gordon Moore,the founder of Intel, stated in 2001 that: “One of the most important developmentsfor the commercial semiconductor industry (...) was the antitrust suit filed againstWestern Electric in 1949 by the Department of Justice. It resulted in a consent decreein 1956 that required Western Electric to license all of its patents to any domesticcompany royalty-free. (...) Under these conditions, Bell Labs essentially became anational industrial research facility. This allowed the merchant semiconductor industry“to really get started” in the United States (...) [T]here is a direct connection between
4Arguably, the case against the Bell system might be special, as Bell had no incentives to reduceits innovative activity after the consent decree due to its regulation and market power in telecommu-nication. Suggesting a broader applicability of our results however, Galasso and Schankerman (2015a)shows that after a patent is invalidated, patent holders do not decrease their research either.
5
the liberal licensing policies of Bell Labs and people such as Gordon Teal leaving BellLabs to start Texas Instruments and William Shockley doing the same thing to start,with the support of Beckman Instruments, Shockley Semiconductor in Palo Alto. This(...) started the growth of Silicon Valley” (Wessner et al., 2001, p. 86). David Teeceopined in 1997, that “AT&T’s licensing policy had the effect of making its tremendouslylarge IP portfolio available to the industry worldwide for next to nothing (...) [T]here isno doubt that [AT&T’s liberal licensing policy shaped under antitrust policy] contributedtremendously to world welfare. It remains one of the most unheralded contributions toeconomic development – possibly far exceeding the Marshall plan in terms of wealthgeneration it established abroad and in the United States“ (Grindley and Teece, 1997).
The remainder of this paper is organized as follows. In the next section we describethe antitrust suit against Bell and the consent decree. In Section 3 we describe theempirical strategy and the main results. In section 4 we discuss the mechanism drivingout results. Section 5 concludes.
2 The Antitrust Suit against Bell
The Bell System consisted of AT&T, a holding company, Western Electric, whichproduced telephone equipment, the Bell Telephone Laboratories, which engaged inbasic and applied research, AT&T Long Lines which provided long distance servicesand the regional Bell operators for short distance telephone services (Figure 1). From1917 to 1983, the Bell System was the dominant company in the US telecommunicationmarket. It owned or controlled 98% of facilities for long distance and 85% of all facilitiesfor short distance telephone communication. In terms of assets, Bell was the largestcorporation in the world, employing 598,000 people with an operating revenue of $ 2.9billion or 1% of the US GDP at the time.
On January 14, 1949 the United States Government filed an antitrust suit withthe aim to split AT&T from Western Electric.5 The complaint charged that WesternElectric and AT&T had been engaged in the monopolization of the manufacture, dis-tribution and sale of telecommunication equipment in violation of the Sherman Act(Antitrust Subcommittee, 1959, p.46). According to the complaint, Bell eliminated allbuyers and sellers of telecommunication equipment by exclusionary practices including
5This account of facts largely follows the final report to the Antitrust Subcommittee of the Houseon the Bell Consent Decree Program (Antitrust Subcommittee, 1959).
6
exclusive contracts and the refusal to license patents. To correct this, the governmentsought three main remedies: First, Western Electric should be separated from AT&T,split into three competing companies and transfer all its shares of the research sub-sidiary Bell Laboratories to AT&T. Second, AT&T should buy telephone equipmentonly under competitive bidding and all exclusive contracts between AT&T and Westernshould be prohibited. Third, the Bell System should be forced to license all its patentsfor reasonable and non-discriminatory royalties (Antitrust Subcommittee, 1959, p.33).6
None of this would happen.The case ended with a consent decree on January 24, 1956 containing two remedies:
First, the Bell System had to license all its patents issued prior to the decree royaltyfree to any applicant, with the exception of RCA, General Electric and Westinghouse.All subsequently published patents had to be licensed for reasonable royalties. Second,the Bell System was barred from engaging in any business other than the furnishing ofcommon carrier communication.7
2.1 Compulsory licensing was implemented without structuralremedies.
The consent decree forced Bell to license its patents but did not impose any structuralremedies for the telecommunication market. Despite the original intent to split up theBell System, the Department of Justice was unable or unwilling to impose effectiveremedies to restore competition in the market for telecommunication. The absence ofstructural remedies is particularly remarkable since the Bell System was clearly themonopolist in telecommunication and all observers agreed that structural remedieswere necessary to restore competition. The advantage for us is that it allows us toisolate the effect of compulsory licensing on innovation, undisturbed by any potentialeffect of a change in market structure.
6There were two minor remedies: First, AT&T should not be allowed to direct the Bell oper-ating companies which equipment to purchase and second, all contracts that eliminate or restraincompetition shall be ceased.
7As Bell was de facto not active in any other business, the immediate effect of this provision wasthat Bell had to sell three small subsidiaries amounting to less than 0.4% of total turnover within a3-year period: Westrex (a sound-recording distributing subsidiary with annual sales of $16 million);the Teletypesetter Corp (producing teleprinters with sales of $2 Million) and a subsidiary producingtrain-dispatching equpiment (sales of $0.25 Million). In 1956, Bell had a turnover of $ 5.2 Billionleading to the response of Western Electric that the “operations that must be eleminated are notsubstantial”(Antitrust Subcommittee, 1959, p.97)
7
Figure 1: The structure of the Bell System.
The decree was hailed by antitrust officials as a “major victory” and nothing shortof “miraculous”, but observers viewed the decree as very permissive: Business Weekopined that “the consent decree (...) [is] hardly more than a slap on the wrist for thebiggest corporation in the world”. Due to the perceived shortcomings, the Subcom-mittee on Antitrust of US Congress started to investigate if consent decrees in generaland the decree of AT&T in particular were in the public interest.The final report ofthe Committee issued in 1959 pulled the decree to pieces: “the consent decree enteredin the A. T. & T. case stands revealed as devoid of merit and ineffective as an instru-ment to accomplish the purposes of the antitrust laws. The decree not only permitscontinued control by A. T. & T. of Western, it fails to limit Western’s role as theexclusive supplier of equipment to the Bell System, thereby continuing monopoly inthe telephone equipment manufacturing industry.” It was said to be a “blot on the en-forcement history of the antitrust laws” (Antitrust Subcommittee, 1959, pp. 290). Thecommittee also arrived at the conclusion that the process of negotiations was fraudu-lent: “If the deficiencies of the consent decree had resulted from good-faith conviction(...) the consequences would be serious enough. But the manner in which this decreewas consummated (...) also evokes the committee’s condign criticism. It appears that,with one sole exception, every significant idea that was adopted (...) originated withthe defendant”. The “sole exception” was that the Attorney General suggested thatinstead of a outright dismissal of the case a consent decree with “no real injury” to
8
Bell would be more acceptable.The hearings uncovered a timeline of cozy back and forth negotiations and the
intense lobbying of the Department of Defense for the dismissal of the case: Afterthe complaint was filed in January 1949, Bell answered in April to the effect that theallegations were groundless. Nothing happened until early 1952, when the Bell Systemsought and obtained with the support of the Department of Defense a two years freezeof the antitrust suit, arguing that Bell was integral for the war effort in Korea. InJanuary 1953, after the Republican Dwight D. Eisenhower took office in January 1953,Bell began to lobby for the final dismissal of the case. The argument was that the BellSystem was too important for national defense and thus should be kept intact. On June27, 1953 the new Attorney General Herbert Brownell met AT&T’s general counsel T.Brooke Price privately at a judicial conference in White Sulphur Springs, West Virginiato discuss the case. Price argued for dismissal. In response, Brownell gave Price thehint that minor concessions would suffice to “get rid of the case”. Brownell urged thedefendant’s counsel to review their practices and instead of seeking dismissal to submitconcessions that would cause “no real injury to (A.T. & T.’s) business” in order to settle(Antitrust Subcommittee, 1959, p.55).
In May 1954, AT&T presented and in June 1954 submitted a checklist of concessionsto Attorney General Brownell that would be an acceptable basis for a consent decree.The only suggested major remedy was the compulsory licensing of all Bell patentsfor reasonable royalties. The proposal did not require severance of Western Electricnor the end of any other exclusionary practice. In the end - and after several furtherinterventions of the Department of Defense - this proposal served as general frameworkfor the final decree (Antitrust Subcommittee, 1959, p. 55 ff).8 In December 1955,the Department of Justice communicated with AT&T that it was ready to consider adecree of the “general character suggested (by A. T. & T.) in its memorandum (...)dated June 4, 1954” (Antitrust Subcommittee, 1959, p.92). Bell agreed.
2.2 Bell’s large number of important patents allows to mea-sure the effect of compulsory licensing precisely.
At the time of the consent decree, the research subsidiary of the Bell System, theBell Laboratories (Bell Labs), were arguably the most innovative industrial laboratory
8Negotiations continued through 1954 and 1955, but this was “largely shadowboxing” (AntitrustSubcommittee, 1959, p.293).
9
in the world, producing path breaking basic and applied research. Scientists at Bellare credited for the development of radio astronomy (1932), the transistor (1947), thecellular telephone technology (1947), information theory (1948), the solar cells (1954),the laser (1957), and Unix (1969). Often, these inventions were based on breakthroughsin basic research such as understanding the fundamental nature of semiconductors, ofcosmic radiation and the nature of electrons. Up to today, 8 Nobel Prizes were awardedfor work done at Bell. The 1950 staff of Bell Labs alone consisted of four future NobelLaureates in Physics, one Turing Award winner, five future US National Medals ofScience recipients and 10 future IEEE Medals of Honors recipients. In 1950, Bell Labsemployed 6,000 people, of whom one third were professional scientists and engineers(Nelson, 1962; Temin and Galambos, 1987). This was 1% of the whole Science andEngineering workforce at the time.9
The innovative capacity of the Bell Laboratories is reflected in the number andbreadth of compulsorily licensed patents: The consent decree reduced the royalty rate of7,821 patents in 267 USPC technology classes and 35 technology subcategories (Figure2).10 This corresponds to 1.3% of all unexpired US patents in 1956.1112 This largenumber of patents was the result of a long-standing dominance of the Bell System ininnovation. From 1940 to 1970, Bell filed around 543 patents or 1% of all US patentseach year (Figure 3a). In the subcategory of Communication, Bell was responsible foraround 11% of all patents, 4% of all patents on Electrical Devices, 1% of all patents onMaterial Processing and Handling (Figure 3b). In all other fields, it filed on average0.7% of all US patents.
This gives us the opportunity to measure the effect of compulsory licensing preciselyeven if only few high quality patents were suitable as a basis for follow-on innovation.
9According to the National Science Foundation, the number of workers in S&E occupations was182,000 in 1950. Source: https://www.nsf.gov/statistics/seind12/c3/c3h.htm - last accessed 8-30-2016.
10The categorization in broad technology categories based on US patent classifications follows Hallet al. (2001) with the exception that we keep Communications (subcategory 21) because of its impor-tance for Bell separate.
11The consent decree concerned all unexpired patents published before January 1956. As the patentduration was 17 years all patents before 1939 were expired.
12We identify all affected patents with a list of patent numbers published in the “Hearings before theAntitrust Subcommittee” of the US Congress on the consent decree of AT&T in May 1958 (AntitrustSubcommittee, 1958). The list is the complete list of all patents owned by the Bell System in January1956. It also includes patents of Typesetter Corp. which are explicitly excluded from compulsorylicensing in Section X of the consent decree. We mark these patents as unaffected.
10
Figure 2: Fields of compulsorily licensed patents by technology category.
31%31%
14%
8%6%
5%
5%
5%
5%
4%
4%3%
CommunicationsElectrical DevicesMaterial Processing & HandlingElectrical LightingPower SystemsMiscellaneous−ElecMetal WorkingMisc−OthersMeasuring & TestingMisc−MechanicalMisc−chemicalComputer Hardware & SoftwareCoatingApparel & TextilesInformation StorageSemiconductor DevicesMotors Engines & PartsFurniture, House FixturesResinsReceptaclesNuclear & X−RaysOpticsPipe & JointsHeatingTransportationEarth Working & WellsOrganic CompoundsComputer PeripheralsSurgery & Medical InstrumentsGasAgriculture, Husbandry, FoodAgriculture, Food, TextilesMisc−ComputerMisc−Drugs&MedDrugs
11
Figure 3: Size and diversity of Bell’s technology.
(a) Technologies over time.
0
200
400
600
800
# p
aten
ts
30 35 40 45 50 55 60
Filing year
Communication Materical Processing Power Systems
Electrical Devices Electrical Lightning Others
(b) Share of Bell System patents relative to all US patents.
0
5
10
15
20
25
Sh
are
of
Bel
l S
yst
em P
aten
ts o
f al
l U
S (
%)
1940 1950 1960 1970
Year
Communications Electrical Devices
Material Processes & Handling Others
12
2.3 Bell’s broad patent portfolio allows to measure the effectsin markets with and without strong incumbent.
The original complaint charged that Bell used patents to monopolize the sale andmanufacture of communication equipment. Allegedly, Bell refused to license to com-petitors and only bought telecommunication equipment that was produced by Bell’smanufacturing subsidary Western Electric, thus suppressing competition in telecom-munication and adjacent markets such as submarine telephone cable and the two-wayradio.13 Despite these focused complaints, compulsory licensing was not restrictedto telecommunication but applied uniformly to a broad range of patents inside andoutside of Bell’s core business of communication. Bell Laboratories produced a largenumber of patents in fields unrelated to communication but had not been active in anyother business before. The consent decree explicitly banned Bell from entering anyother business than common carrier communication which eliminated Bell as a poten-tial competitor.14 As a consequence, the Bell Case allows us to analyze the effect ofcompulsory licensing in markets with and without a strong incumbent with the intentto block competition.
To visualize that the Bell System had patents inside and outside of telecommuni-cation we use the data of Kerr (2008) to assign the most likely 4-digit SIC industrygroup to each USPC class (Figure 4). Around 42% of all Bell patents have their mostlikely application in Bell’s core business of Telephone and Telegraph Apparatus. Theremainder is spread across a large number of fields with an emphasis on the 2-digit SICindustry major group 36 of electronics and 35 of Industrial Commercial Machinery andComputer Equipment.15
13For example they forced competitors “engaged in the rendition of telephone service to acquireAT&T patent license under threat of (...) patent infringement suits.” or refused “to issue patentlicenses except on condition” to be able to control the telephone manufacturer or by “refusing toauthorize the manufacture (...) of telephones (...) under patents controlled by (...) the Bell System”or by “refusing to make available to the telegraphy industry the basic patents on the vacuum tube” thatare essential for telegraphy to compete with telephone or by refusing to purchase of equipment “underpatents which are not controlled by Western or AT&T, which are known to be superior”.(AntitrustSubcommittee, 1958, p.3838)
14To comply with this restriction, Bell had to sell three subsidiaries within a 3-year period: Westrex(a sound-recording distributing subsidiary with annual sales of $16 million); the Teletypesetter Corp(producing teleprinters with sales of $2 Million) and a subsidiary producing train-dispatching equpi-ment (sales of $0.25 Million). In 1956, Bell had a turnover of $ 5.2 Billion leading to the response ofWestern Electric that the “operations that must be eleminated are not substantial”(Antitrust Sub-committee, 1959, p.97).
15We thank Bill Kerr for sharing his data.
13
Figure 4: Fields of compulsorily licensed patents by industry group .
42%
11%9%
8%
4%
3%
3%3%
3%2%
2%
3661 Telephones and Telegraphs
3651 Audio and Video Equip
3711 Motor Vehicles
Industries with <50 patents
3829 Measuring and Controlling
3629 Electrical Industrial Appar
3571 Electronic Computers
2621 Paper Mills
3541 Machine Tools
3471 Electroplating
3089 Plastics Products
3699 Electrical Machinery
3357 Insulating of Nonferrous Wi
3399 Primary Metal Products
8071 Medical Laboratories
1799 Special Trade Contractor
3537 Industrial Trucks
3553 Woodworking Machinery
8062 Hospitals
2281 Yarn Spinning Mills
3599 Industrial Machinery
14
The main reason why Bell had patents outside its core field was that the BellLabs were committed to basic research. When the Bell Labs were founded in 1925,no one knew which part of science might yield insights for the problems of electriccommunication (Rosenberg, 1990; Nelson, 1962, p.31). As a result, the Bell Systemdecided that - besides supporting the day-to-day need of the System - the Bell Labswould engage in basic science, assuming it would eventually yield products for somepart of the large Bell System (Gertner, 2012; Nelson, 1959; Arora et al., 2015, p. 31).16
Another reason for the diverse portfolio was Bell’s engagement in the war effort ofWorld War II. In the middle of the 1940s, about 75% of Bell Labs work was donefor the Allies, leading to an increase in the number of patents of around 50% (Figure3a). The Bell Laboratories were instrumental in inventing the radar but also took overaround a thousand different projects from tank radio communication to encipheringmachines for scrambling secret messages (Gertner, 2012, p.59 ff.). In Figure 5 we showthe number of Bell patents associated with Radar and Cryptography before, during,and after the war. These two technologies alone make up 156 patents in the consentdecree.17
3 Compulsory licensing increases follow-on innova-tion.
The consent decree forced Bell to grant licences for free to all US companies. Yet,whether and by how much the compulsory licensing would affect follow-on innovationis a priori unclear. Bell was already licensing patents to other companies prior tothe decree, at royalty rates in the range from 1% - 6% of net sales price, which wereshaded if a cross-license was agreed upon (Antitrust Subcommittee, 1958, p. 2685).18
16According to the first head of basic and applied research at Bell Labs, Harold Arnold, his depart-ment would include “the field of physical and organical chemistry, of metallurgy, of magnetism, ofelectrical conduction, of radiation, of electronics, of acoustics, of phonetics, of optics, of mathematics,of mechanics, and even of physiology, of psychology and meteorology”. This broad focus led to majoradvances in basic science, but also to a large number of unused patents. For example, an investigationof the FCC in 1934 reported that Bell owned or controlled 9,255 patents but only actively used 4,225covered inventions (Antitrust Subcommittee, 1958, p.3842)
17We identify both technologies by their USPC class: We use the class 342 with the title “Commu-nications: directive radio wave systems and devices (e.g., radar, radio navigation)” to classify Radarand class 380 “Cryptography”. This implies a significant number of these patents would have not beeninvented if not for the war.
18For example, prior to the decree to get access to the transistor patents each licensee had to paynon-refundable advance payment of $ 25,000 (around $ 220,000 in today’s Dollar) which was credited
15
Figure 5: War Technologies created by Bell Labs.
0
5
10
15
20
30 40 50 60 30 40 50 60
Radar Cryptography
# P
aten
ts
Filing year
16
Still, prior to the antitrust suit asymmetric information or coordination failure mighthave prevented additional licensing deals outside the cross licensing agreements. Theconsent decree may have reduced potential “bargaining failures”. It also took away thediscretion to grant or to not grant a license for strategic reasons. And finally it loweredthe cost of licensing. In this section we estimate the impact of the compulsory licensingon follow-on innovation.
3.1 Data and Empirical Strategy
For our estimation, we use comprehensive patent data for the US from the “WorldwidePatent Statistical Database” (Patstat) of the European Patent Office (EPO).19 Thebibliographic data starts in 1920 and comes from the United States Patent and Trade-mark Office (USPTO). The citation data is complete from 1947 onward. In 1947, theUSPTO started to publish citations of prior art on the front page of the patent andtherefore citation data is publicly available only from this date (Alcacer et al., 2009).20
The consent decree reduced the royalty rate for 7,821 patents, corresponding to1.3% of all unexpired US patents.21 We identify all affected patents with a list ofpatent numbers published in the “Hearings before the Antitrust Subcommittee” of theUS Congress on the consent decree of AT&T in May 1958 (Antitrust Subcommittee,1958).22 As Bell Labs filed more than 80% of all affected patents, we use in the followingBell Labs as pars pro toto for the Bell System.
In an ideal world, we would like to compare the realized number of follow-on in-novations relating to Bell patents with and without the consent decree. There aretwo problems, however: First, we cannot use the realized number of inventions be-cause a census of innovations does not exists. Second, we can observe only the stateof the world in which the compulsory licensing of Bell patents happened but not the
against royalty payments (Antitrust Subcommittee, 1958, p.2957). Royalty payments amounted to5% percent of the net selling price in 1950 and were reduced to 2% in 1953 (Antitrust Subcommittee,1959, p. 117).
19Patstat contains patent data from more than 100 countries.20The first patent to include prior art was issued on February 4, 1947. Yet, inventions were evaluated
against the prior art already since passage of the Patent Act of 1836. Prior to 1947, however, the priorart was available only from the “file history” of the issued patent, which is not contained in Patstat.
21The consent decree concerned all unexpired patents published before January 1956. As the patentduration was 17 years all patents before 1939 were expired.
22The list is the complete list of all patents owned by the Bell System in January 1956. It alsoincludes patents of Typesetter Corp. which are explicitly excluded from compulsory licensing inSection X of the consent decree. We mark these patents as unaffected.
17
Table 1: Citation statistics
All Other Bell System Bell SystemAffected Sample
mean mean meanFiling Year 1944.5 1943.6 1940.6Publication Year 1947.6 1946.5 1943.1Years after 1956 in patent protection 8.6 7.5 4.1Total cites 3.5 5.5 5.1Citations by other companies 3.1 4.5 4.3Self Citations 0.2 0.7 0.7Citations by other companies prior to 1949 0.3 0.9 1.4Observations 292524 7820 4731
Notes: Data for all US patents published between 1939 and 1956. "All Other" includes all patentsof non-Bell System companies in technologies where a Bell System company published at least onepatent. A citation is identified as a self-cite if the applicant of cited and citing patent is the same.
counterfactual situation without the consent decree.To address the first problem, we use patent citations to measure follow-on inno-
vation because they are consistently available from 1947 onward, in contrast to mostalternative measures of innovative activity such as new products or R&D spending. Inaddition, they have a high frequency which allows a precise measurement of effects.Bell patents could be freely licensed after the consent decree, but patents that built onlicensed Bell patents still had to cite them. Thus, we can use patent citations as a mea-sure for follow-on innovation even though they lost their power to exclude competitors(Williams, 2015).
Using patent citations comes with the caveat that some citations might have beenadded by the patent examiner, which adds noise to the measure (Alcacer and Gittel-man, 2006; Alcacer et al., 2009). Table 1 shows summary statistics for all patents inour data set from 1939 to 1956 in columns (1) and (2) and of the Bell patents we usein our baseline sample in column (3).23 The average non-Bell patent in our data setreceives 3.6 citations per patent and 5.6% of these citations are self-citations. BellSystem patents on average receive 5.5 citations and 10.9% of these citations are self-citations.24 In the subsample of patents published until 1949, the average Bell patentreceives 5.1 citations of which around 12% are self-citations.
23To make the statistics comparable for affected and not affected patents we only consider technologyclasses in which Bell is active.
24Except when explicitly mentioned in the text we correct in all our regressions for self-citationsbecause we are mainly interested to which extent other companies built on Bell Labs patents.
18
To rule out problems arising from the possibility that Bell’s patenting strategy mayhave changed after the complaint became known, we use only patents published by1949, the year the lawsuit against Bell started. The consent decree stated that onlypatents published before 1956 were to be compulsorily licensed. As a consequenceof this cut-off date in publication years, more than 98% of the patents affected bythe consent decree were filed before 1953, and 88% in 1949 or earlier. This impliesthat the characteristics of the majority of the affected patents were fixed before theDepartment of Justice filed its initial complaint. To be on the safe side, we use onlypatents published before 1949. Results do not change when we use all patents affectedby the consent decree.
To address the second problem, we use as control group all other patents that arepublished in the same year, that are in the same USPC technology class and that havethe same total number of citations as the Bell patents up to 1949. The reason forusing these control variables is that, on average, young and high quality patents arecited more often. Matching the technology class controls for the number of companiesthat are active in the same field, i.e. for the number of potential follow-on inventors.The identifying assumption is that conditioning on these control variables removes anysystematic difference in follow-on citations between Bell and the control patents thatare not due to compulsory licensing. We provide evidence that our assumption holdsin Section 3.5.
One potential concern with this identification strategy might be that the antitrustauthorities chose compulsory licensing as a remedy for a specific reason related to thepotential of follow-on research. According to the complaint and historical records,the motivation for the compulsory licensing was that Bell allegedly used patents inthe field of telecommunication to block competitors and prevent them from producingtelephone equipment. The concern could be that blocking patents are also patentswhich would have experienced particularly strong follow-on innovation even in theabsence of compulsory licensing. Obviously this concern does not apply to patentsoutside telecommunication that were not targeted by the consent decree. Bell wasactive in many other fields outside telecommunication for reasons unrelated to theantitrust case. Around two thirds of all patents Bell held were from other fields. Theywere included in the compulsory licensing regime of the consent decree not becausethey were blocking, but purely by association with the Bell System. Hence, there is noreason to expect any confounding effects.
19
Consider now the patents from telecommunication and suppose they were selectedfor compulsory licensing because they blocked competitors. It is unlikely that theywould have experienced particularly strong follow-on research in the absence of thecompulsory licensing. The reason is that in the absence of compulsory licensing nothingwould have changed for Bell because compulsory licensing was implemented withoutany other remedies aimed at restoring competition. So, if these telecommunicationpatents indeed blocked competitors and if compulsory licensing had not occurend,the patents would have continued to block the competitors. Consequently, it seemslikely that these blocking patents would have continued to receive the same numberof citations as the control patents that are matched on the number of citations priorto 1949. To strengthen this point we show in Section 3.5 that companies that didnot benefit from compulsory licensing did not start to cite Bell patents more. Thusthe matched control patents are a plausible counterfactual for patents both inside andoutside of telecommunication.
3.2 The consent decree increased citations of other companiesto Bell patents by 11%
In this section we estimate the impact of the compulsory licensing on citations usingthe following difference-in-differences specification:
#Citationsi,t = α + βt ·Belli + Y earFEt + εi,t (1)
where Citationsi,t is the number of follow-on citations of other companies to theBell patents and the control patents. Belli indicates whether the patent is owned by theBell System and is therefore treated. For our analysis, we use the 4,732 patents of Bellpublished before in 1949. In our data, there are 4,532 (95.7%) Bell patents and 70,139control patents.25 By using the weights of Iacus et al. (2009), our estimates identifythe average treatment effects on the treated, the average difference in the number ofcitations per year between patents affected by the consent decree and control patents.26
254.3% of Bell’s patents cannot be matched and are therefore not included in our estimation.26Iacus et al. (2009) proposes to use a weight of 1 for the treatment variable and a weight of
NT reatment,Strata/NControl,Strata·NControl/NT reatment whereNControl is the number of control patentsin the sample, NControl,Strata is the number of control patents in a strata defined by the pub-lication year, the USPC primary class and the number of citations up to 1949. NT reatment andNT reatment,Strata are defined analogously. Using this weights we arrive at a non-parametric estimatefor the average treatment effect on the treated.
20
Figure 6: Effect of compulsory licensing on subsequent citations.
−1
0
1
2
3
4
Exc
ess
cita
tions
49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70
Filing year of citing patent
Notes: This graphs shows the estimated number of yearly excess citations of patents affectedby the consent decree ("Bell patents") relative to patents with the same publication year,in the same three-digit United States Patent Classification (USPC) primary class andwith the same number of citations up to 1949. To arrive at these estimates we regress thenumber of citations in each year on an indicator if the patent under consideration is affectedby the consent decree and year fixed effects (Equation 1). The dashed line represents the90% confidence bands for the estimated coefficient. The sample under consideration contains4,532 Bell patents and 70,139 control patents. We cannot match 200 Bell patents to controlpatents. To adjust for the different number of control patents per treatment patent in eachstratum, we use the weights suggested by Iacus et al. (2009).
21
Figure 6 shows that from 1949 to 1954 the average number of citations of treatmentand control patents track each other very closely, speaking in favor of parallel trendsfor the Bell patents and the control group. In 1955, the average number of citations ofother companies to Bell patents starts to increase and it converges again in 1966. Thecoefficients are significantly different from zero at the 10 percent level.
In Column (1) of Table 2 we estimate the average effect of the consent decree oncitations of other companies for the years 1949 to 1960. In the treatment period, theconsent decree resulted in 0.021 additional citations relative to the mean of 0.183. Thus,on average, the consent decree increased citations to Bell patents by other companiesby 11% from 1955 to 1960. Considering only the 4,532 patents published before 1949,this implies a total increase of 462 citations. If we assume homogeneous effects for all7,821 patents published up to 1956, the total number of excess citations is 797. Theeffect is also positive and statistically significant if we include all patents up to 1956,the year of the consent decree.
Back of the envelope calculations suggest that the additional patents for othercompanies induced by the consent decree had a total value of up to $ 5.8 billion.In column (4) of Table 2 we weigh the citations with average Dollar values derivedfrom Kogan et al. (2012). We calculate the average Dollar value for a patent in eachtechnology class and publication year.27 We then use these average values in eachyear and technology class to weigh each citing patent. According to these estimates,each compulsorily licensed patent created an additional value of $ 124,000. Assuminghomogeneous effects for all 7,821 treated patents, the consent decree led to around $ 5.8billion in economic value over 6 years. These calculations represent an upper bound,because they assume that without the additional citations induced by the consentdecree the patent would not have been invented, i.e. that the citation was strictlynecessary for the citing invention.
The effect is measurable across the quality distribution of patents. In columns (7)and (8) of Table 2 we split all patents by the number of citations a patent received in thefirst five years after publication. The effect is stronger for high quality patents, but theeffect is also statistically significantly different from zero for low quality patents. Theeffect is also not exclusively driven by the computer industry which was just about tostart in 1956. In column (6) we find a similar effect when dropping all 492 Bell patentsclassified in the technology subcategory Computer Hardware and Software, Computer
27To arrive at these estimates Kogan et al. (2012) measure abnormal stock returns around thepublishing date of the patent.
22
Peripherals and Information Storage or “Others” (Hall et al., 2001). The effect is alsonot driven by the concurrent consent decree of IBM in 1956 or RCA in 1958. IBMand RCA were defendants in an antitrust case with compulsory licensing as outcome.In column (9) of Table 2 we drop all citations from patents that also cite either thepatents of RCA or the patents of IBM. In a companion paper we analyze the effects ofdifferent types of royalties for all other consent decrees in the US history.
It is noteworthy that the increase in citations depicted in Figure 6 started not onlyin 1956, the year of the consent decree, but already in 1955. This is plausible because onMay 28, 1954, Bell itself already suggested a consent decree including the compulsorylicensing of Bell System patents. Thus, both the Bell Laboratories and companiesbuilding on the patents of Bell could have known that compulsory licensing was in thecards as early as May 1954 (Antitrust Subcommittee, 1959). This timeline is supportedby the cumulative abnormal stock returns to the stocks of AT&T shown in Figure 7.28
Up to the election of Eisenhower, cumulative abnormal returns were centered aroundzero. Beginning in 1953 and ending at the beginning of 1954, cumulative abnormalreturns increased to around 11%. The large uptick at the end of February/beginningof March 1954 is synchronized with the meeting on the consent decree of AT&T onMarch 3, 1954 (Antitrust Subcommittee, 1958, p. 1956).29 There is no more persistentpositive or negative change in the abnormal return until 1959. In particular the consentdecree itself in 1956 did not seem to have had any more informational value.
We can also infer from the behavior of Bell that as early as 1955 compulsory licensingwas expected to come. According to the consent decree, all patents were compulsorilylicensed for free if they were published before January 24, 1956. If they were publishedafter this cut-off date, they were licensed under a reasonable and non-discriminatorybasis. So starting from the date when Bell became aware of the clause it had anincentive to delay the publication of its patents beyond the cut-off date. According tothe data, Bell started to delay its patents at the patent office beginning in the firsthalf of 1955. To pin down the date we compare for a given filing year the propensity ofa Bell patent to be published with the propensity that control patents are published.In Figure 8, we show these hazard rates of publishing for the filing years 1949 and
28The first media mentioning that a consent decree for Bell was about to happen was on May13 1955 in the New York Times. Public officials confirmed that top level negotiations are ongoing“looking towards a settlement of the AT&T case”.
29The content of the meeting could not be cleared up despite intense questioning. In Appendix A.1in Figure 18 is a transcript of the questions and answers.
23
Table 2: The effect of compulsory licensing on subsequent citations
(1) (2) (3) (4) (5) (6) (7) (8) (9)Citation of other companies Bell All
Base-line
Up toto 56
Dollarweighted
Lowqual-ity
Highqual-ity
w/oCom-puter
w/oIBM &RCA
Self-Cites
Total-Cites
Bell -0.4 -0.6∗∗∗
0.1 -0.5 -0.3 -0.5 -0.6 1.4∗∗∗ 0.5
(0.5) (0.2) (2.9) (0.4) (0.9) (0.5) (0.5) (0.3) (0.7)Bell x I(55-60)
2.0∗∗∗ 1.9∗∗∗ 12.1∗∗∗ 1.0∗∗ 3.1∗∗∗ 2.2∗∗∗ 2.0∗∗∗ -0.6∗ 1.7∗
(0.6) (0.6) (4.0) (0.4) (1.0) (0.6) (0.6) (0.3) (0.9)Constant 18.3∗∗∗19.9∗∗∗ 83.2∗∗∗ 8.4∗∗∗ 28.2∗∗∗ 18.7∗∗∗ 17.6∗∗∗ 1.0∗∗∗ 18.9∗∗∗
(1.2) (1.6) (3.7) (0.4) (1.4) (1.4) (1.1) (0.0) (0.3)# treated 4533 7111 4533 2279 2254 4042 4533 4444 4731Clusters 225 253 225 194 179 160 225 223 222Obs. 8965561121648 896556 580356 316200 700500 896556 854592822948
Notes: This table shows the results from a difference-in-differences estimation with years1949 to 1953 as pre-treatment period and 1954 to 1960 as treatment period. The estimationequation is
#Citationsi,t = β1 ·Belli + β2 ·Belli · I[1954 − 1960] + PeriodFE + εi,t (2)
where I[1954−1960] is an indicator for the treatment period from 1954 to 1960 and PeriodFEis a fixed effect for the treatment period. The variable "Bell" is an indicator if a patentis published by a Bell System company before 1949 and therefore treated by the consentdecree. As control patents, we use all patents which were published in the US matched bypublication year, primary United States Patent Classification (USPC) technology classand the number of citations up to 1949. As dependent variable we use in the first column allcitations by other companies than the filing company, in the second column we extend oursample of affected patents to 1956 and in the third column we use the sample up to 1949and weight each citation by the average Dollar value of a patent in the same publication-yearand technology class derived from the values provided by Kogan et al. (2012). In column (4)and (5) we split the sample by their citations prior to 1955 to measure quality of patents.In column (6) we exclude patents which are classified in technology subcategories related tothe computer and in column (7) we exlude all citations by patents of IBM and RCA andall patents that cite IBM and RCA patents. IBM had a consent decree with a compulsorylicensing of patents in 1956 as well and RCA had a consent decree in 1958. In column (8)we match patents on publication year, technology class and self-citations prior to 1949 anduse self-citations as outcomes. In column (10) we match on total citations prior to 1949 anduse total citations as outcomes. All coefficients are multiplied by 100 for better readability.Standard errors are clustered on the three-digit USPC technology class level and *, **, ***denote statistical significance on 10%, 5% and 1% level, respectively.
24
Figure 7: Cumulative abnormal returns of AT&T stocks.C
om
pla
int
Eis
enh
ow
er e
lect
ion
Bel
l’s
off
ers
Co
nse
nt
dec
ree
−.05
0
.05
.1
.15
Cu
mu
lati
ve
abn
orm
al r
etu
rn o
f A
T&
T
1948 1949 1950 1951 1952 1953 1954 1955 1956 1957
Notes: This figure shows the cumulative abnormal stock return of AT&T compared to othercompanies in the Dow Jones index. We start cumulating in January 1948. The events markedin the graph are the beginning of the antitrust suit on January 14 1949, the EisenhowerElection on November 4, 1952, AT&T’s offering of compulsory licensing on June 4, 1954 andthe consent decree on January 25, 1956.
25
1953.30 For the filing year 1949, the publishing rates per year are very similar for Bellpatents and patents from other companies. If at all, Bell patents were published abit earlier. For the filing year 1953, this picture is reversed: Starting in the first halfof 1955, Bell patents had a significantly lower probability of being published. This isconsistent with Bell trying to delay the publications of its patents and having credibleinformation about the general outline of the consent decree in the first half of 1955 atthe latest.
3.3 The decrease in Bell’s patenting was limited because ofregulation
Table 2 column (8) also reports results on how Bell itself reacted to the consent decree.The number of self-citations, a measure for the development of own technologies, showsa decrease of 0.005 self-citations (Akcigit and Kerr, 2010). This decrease is statisticallysignificant, but is not large enough to dominate the increase in citations by othercompanies: Column (9) shows that total citations increased by 0.013. This speaks infavor of a net increase in innovation due to the consent decree.
Bell’s innovation output in terms of number of patents continued to grow in linewith expectations. In Figure 9a we construct a synthetic Bell and compare it withthe actual patent output of the Bell system. To construct a synthetic Bell, we firstcalculate the share of Bell patents of all patents in each technology subcategory for theyears 1946, 1947 and 1948. Then we assume that Bell’s growth would have been inline with the growth of other companies that existed before 1949 in these technologysubcategories so that Bell would have held its share constant for the following years.As Figure 9a shows, Bell’s patenting is on average smaller than the patenting of thesynthetic control, but not by much. 31
The continued investment in research was in line with the incentives the consentdecree and the regulators provided to Bell. The consent decree did not significantlychange the profitability from new patents. The consent decree mandated that Bellcould demand “reasonable” licensing fees as well as reciprocal grant-backs for all patents
30The years 1951 and 1956 are shown in figure 21 in the Appendix and all other years are availablefrom the authors on request.
31In Figure 20 in the Appendix C we compare Bell with other control companies and the resultsare similar: Bell’s growth is in line - but at the lower end - of similar companies. The only exceptionis the growth of General Electric which is much larger, highlighting the problem of constructing acounterfactual for a single company.
26
Figure 8: Hazard rate for patent publication by filing year
(a) Application year 1949
0
.05
.1
.15
Sh
are
of
pat
ents
pu
bli
shed
49 50 51 52 53 54 55 56 57 58 59 60
Publication year in semester
Bell
Control
(b) Application year 1953
0
.05
.1
.15
.2
Sh
are
of
pat
ents
pu
bli
shed
49 50 51 52 53 54 55 56 57 58 59 60
Publication year in semester
Bell
Control
27
Figure 9: Bell System after the consent decree.
(a) Patenting over time: Bell System and synthetic Bell .
400
450
500
550
600
650#
Pat
ents
1945 1950 1955 1960 1965 1970
Filing year of the patent
Bell
Synthetic Bell
(b) Share of communication patents over time
.2
.25
.3
.35
.4
.45
Sh
are
of
pat
ents
in
Co
mm
un
icat
ion
an
d O
pti
cs
1930 1940 1950 1960 1970 1980
Filing year
Notes: Subfigure a) shows the total number of patents filed by the Bell System compared to asynthetic Bell. To calculate the synthetic Bell, we calculate the share Bell’s patents had in each 2-digit technology subcategory relative to all patents of companies that had at least one patent before1949. We then assume that in the absence of the consent decree, Bell’s patenting would have grown ineach subcategory by the same pace as all other companies that existed before 1949. As a consequence,Bell’s share in each technology subcategory is held constant. In a last step, we add the numberof patents up to a yearly sum. Subfigure b) shows the share of patents related to communicationrelative to all patents filed by Bell. We define technologies related to communication as the NBERsubcategories “Communication” and “Optics” (Hall et al., 2001). We include “Optics” because afterthe invention of the Laser at Bell Labs in 1958, Bell officials apparently predicted correctly that opticsmight be crucial for the future of communication (Gertner, 2012, p. 253).
28
published after January 1956. The only difference was that Bell had to give a licenseto any applicant and grant-backs to Bell were restricted to the communication field.32
The reasonable royalty rates Bell charged were not much different compared to thepre-decree royalties: Bell had standard royalties for 84 licensing categories. After theconsent decree, it left rates in 59 categories unchanged, reduced 24 rates and increasedone.33 To take into account that prior complementary patents became royalty free, itapplied a 60% discount to royalties in the years 1956 to 1958 and a 30% discount in1959 and 1960. After five years Bell was back to full royalties. Bell expected that by1960 its patent position would be fully restored and the licensing income would be atthe same level (Antitrust Subcommittee, 1959, p.111).
Bell also had little incentive to reduce investment in R&D because the Bell Systemwas subject to a rate of return regulation following the Communication Act of 1934.According to the data that is available from yearly reports from 1950-1957 and from1966-1982, the regulation of Bell resulted in a more or less fixed ratio of R&D tooperating revenue of in between 2%-3% over the whole observational period (Noll,1987). As the size of the Bell System grew tremendously in 1950 and 1960s also theabsolute level of R&D effort increased: From $ 3.2 Billion in 1950 to $ 5.3 Billionoperating revenue in 1955 and to $ 11 Billion in 1965, leading to an increase in staffat Bell Labs from 6 Thousand in 1950, to 10 Thousand 1955 to 12 Thousand in 1960and 15 Thousand in 1965 (Temin and Galambos, 1987).
But even if the consent decree offered no incentive to reduce the size, it offered anincentive to redirect its research budget towards applications in the communicationfield. Prior to the consent decree, Bell had the option to expand to other businesses.After the consent decree, Bell’s future was bound to common carrier telecommuni-cation. Bell correspondingly refocused its research program on its core business andincreased its share of patents in fields related to communication (Figure 9b).
These results are consistent with Galasso and Schankerman (2015a) showing thatlarge companies on average do not reduce follow-on significantly if they loose a patentdue to litigation. The only exception is if the large company looses a patent outside ofthis core-fields, then it reduces innovation in the field of the patent under considerationand reacts by redirecting future innovation to a different but related field than the
32As pre-condition of licensing any patent Bell could require the applicant to grant Bell a licensefor all patents of the applicant at reasonable royalty rates that were related to common carrier com-munication (Antitrust Subcommittee, 1959, p.105).
33We show the post-decree royalty rates in Appendix E.
29
invalidated patent.
3.4 The transistor technology was licensed earlier and follow-on innovation starts earlier.
Understanding the effect of intellectual property rights on the transistor technology isof particular interest because it is one of the few opportunities to study the impact ofintellectual property rights on the diffusion of a general purpose technology (Helpman,1998; Gordon, 2016).34 But analyzing the transistor case can also add to our under-standing of the effects of the consent decree, because - in reaction to pressure from theantitrust authorities - Bell started to license the transistor technology already in 1952,creating variation in the timing of licensing. Repeating our main regression in this sub-sample, we find that citations to the transistor patents increase shortly thereafter in1953 and by more than 20%. The magnitude and the timing of the effect is consistentwith the idea that patents on more important inventions experience a larger increaseafter compulsory licensing and that standardized licensing is key for an increase infollow-on innovation.
The transistor was arguably the most important invention of Bell Labs. As themost basic element of modern computers, the transistor was instrumental in creatingentire industries and heralded the beginning of the information age. The invention ofthe transistor earned John Bardeen, Walter Brattain and William Shockley the NobelPrize in Physics in 1956. They demonstrated the first functional transistor in December1947, filed patents in June 1948 and announced the invention on July 1st of the sameyear. The patents were published in 1950 and 1951. Bell, the military and the researchcommunity at large immediately understood the importance and value of the transistorfor the future of electronics and communication.
Due to the ongoing antitrust suit, Bell’s management was reluctant to draw atten-tion to its market power by charging high prices for transistor components or licenses(Mowery, 2011). So to appease the regulator, Bell’s top managers agreed to share andlicense the transistor device (Gertner, 2012, p.111).35 Thus, Bell decided to activelypromote the diffusion of the transistor technology by introducing a standardized non-discriminatory licensing contract and by organizing conferences in 1952 to explain the
34There are case studies about the importance of patents for the diffusion of the steam engine(Boldrin and Levine, 2007).
35In addition, the military services encouraged the dissemination of the technology (Mowery, 2011).
30
Figure 10: Annual Treatment Effects of Transistor Patents .
−10
0
10
20
30
Exc
ess
cita
tions
49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70
Filing year of citing patent
Notes: These graphs shows the estimated number of yearly excess citations of transistor-related patents affected by the consent decree ("Bell patents") relative to patents with thesame publication year, in the same three-digit United States Patent Classification (USPC)primary class and with the same number of citations up to 1949. We define Bell patentsas transistor-related if they are either one of the two main transistor patents (Patent #2,524,035 and Patent # 2,569,347) or were filed by inventors associated with these patentsor their co-inventors. To arrive at these estimates we regress the number of citations in eachyear on an indicator if the patent under consideration is affected by the consent decree andyear fixed effects. The dashed line represents the 90% confidence bands for the estimatedcoefficient. To adjust for the different number of control patents per treatment patent in eachstrata, we use the weights suggested by Iacus et al. (2009).
31
Table 3: The transistor subsample
(1) (2) (3) (4) (5) (6)Publication year <1952 <1949Subsample Base-
lineTransistor No
transistorBase-line
Transis-tor
Notransistor
Start treatment 55 53 55 55 53 55Bell -0.3 -1.4 -0.4 -0.4 -0.9 -0.4
(0.3) (1.2) (0.3) (0.5) (2.1) (0.5)Bell x I(53/55-60)
1.9∗∗∗ 8.0∗∗ 1.8∗∗∗ 2.0∗∗∗ 4.4∗ 2.0∗∗∗
(0.5) (3.7) (0.5) (0.6) (2.3) (0.6)Constant 19.0∗∗∗ 23.0∗∗∗ 18.8∗∗∗ 18.3∗∗∗ 22.3∗∗∗ 18.1∗∗∗
(1.4) (3.2) (1.4) (1.2) (2.9) (1.2)# treated 5758 204 5554 4533 168 4365Clusters 239 65 237 225 58 223Obs. 1035421 64891 1021733 896556 56664 886044
Notes: This table shows the results from a difference-in-differences estimation. For the regression withthe transistor patents, we define the treatment period starting in 1953, for the non-transistor patentswe define the treatment period starting in 1955 as in our main regression. The variable "Bell" is anindicator if a patent is published by a Bell System company before 1949 and is therefore treated bythe consent decree. As control patents, we use all patents which were published in the US matchedby publication year, primary United States Patent Classification (USPC) technology class and thenumber of citations as defined below. As dependent variable, we use all citations by other companiesthan the filing company. We define patents as transistor patents if they were filed by a member ofthe original transistor team or one of their co-authors. In columns (1) to (3) we use all patents witha publication year before 1952 and we match all citations up to and including 1951. Correspondingly,in column (4) to (6) we use patents and citations up to 1949.
32
technology. In April 1952, over 100 representatives from 40 companies gathered fora nine-day Transistor Technology Symposium, including a visit to Western Electric’stransistor manufacturing plant in Allentown, PA. After the conference, 30 companiesdecided to license the transistor technology for a non-refundable advance payment of $25,000 (around $ 220,000 in today’s dollars) that was credited against royalty payments(Antitrust Subcommittee, 1958, p.2957). Royalty payments amounted to 5% of the netselling price in 1950 which was reduced to 2% in 1953 (Antitrust Subcommittee, 1959,p. 117).36
To be able to separately analyze the transistor, we identify all patents relatedto the original transistor inventor team among the consent decree patents. Therewere two main transistor patents: Patent # 2,524,035 with the title "Three-ElectrodeCircuit Element Utilizing Semiconductive Materials" granted in 1950 to John Bardeenand Walter Brattain and Patent # 2,569,347 with the title "Circuit Element UtilizingSemiconductive Material" issued to William Shockley in 1951. To these two patents,we add all patents of all researchers who actively worked towards the development ofthe transistor at Bell Labs.37 Then we add all patents from all co-authors. With thisprocedure we identify 294 “transistor” patents affected by the consent decree, i.e. heldby Bell Labs. This sample is most likely a super-set of all transistor patents. Forexample, it also includes patent # 2,402,662 with the title “Light sensitive device” ofRussell Ohl, the original patent of the solar cell. The median publication year of thepatents in the transistor sample is 1946 and 194 of these patents are also included inour original sample.
According to Figure 10 and Table 3, transistor patents experienced an around fivetimes higher increase in follow-on citations than consent decree patents. The impactis measurable starting in 1953 and lasts for at least 15 years. Given that the effectalready starts in 1953 and does not strongly increase in 1956, this speaks in favor of aneffect of open and standardized licensing as the main reason for an increase in follow-on innovation, rather than the decrease of royalty fees. To arrive at these graphs, weextend our original sample to patents published up to 1951 and we match pre-citationsup to 1951. Thus, the coefficient of 1952 which is not matched and is close to zerospeaks in favor of parallel trends. Despite the large effects, the transistor patents do
36The two-volume proceedings of Bell’s symposium on the topic in 1952 were nicknamed “Ma Bell’scookbook” as its “recipes” found widespread application in transistor manufacturing.
37Researcher which we classify to actively contribute to the transistor at Bell Labs were in alphabet-ical order Bardeen, Bown, Brattain, Fletcher, Gardner Pfann, Gibney, Pearson, Morgan, Ohl, Scaff,Shockley, Sparks, Teal and Theurer. (e.g. Nelson, 1962)
33
not drive the effect in our main sample. In column (4) to (6) we analyze our originalsample up to 1949, with and without transistors. We find large but insignificant effectsfor the transistor sample and virtually the same effect without transistors.
These results suggest that standardized licensing has indeed the effects suggestedby our results on the effects of the consent decree.38
3.5 Auxiliary analysis support the common trend assumption.
In the following, we present three types of auxiliary analyses suggesting that the effectsof our main analysis are not driven by correlated shocks to a particular technology,citation substitution or the particular choice of matching variables.
Pseudo outcome: Citations to Bell patents from unaffected companies staystable.
The 1956 consent decree singled out three companies that were excluded from free com-pulsory licensing of Bell patents: the General Electric Company, Radio Corporation ofAmerica and Westinghouse Electric Corporation. The reason was that these companiesalready had a general cross-licensing agreement in place, the “B2-agreements” datedJuly 1, 1932. A fourth company, the International Telephone and Telegraph Company(ITT), was also not affected by the decree as it had a patent pool with Bell. Resultsare shown in Figure 11 and Table 4.
In Figure 11 and column (2) of Table 4 we repeat our analysis but use only thecitations of the B2-companies (including ITT) as the dependent variable. We do notfind any effect which means that the consent decree did not change the behavior ofexcluded companies. This speaks against a common technology shock as explanationfor the measured effects. As these companies in total make up 15% of all citationsto Bell patents, this null effect is not due to a lack of measurability. In Appendix B
38The large magnitude of the effect should not be taken at face value. The identifying assumption ofthis regression is that the control patents would have had the same number of citations as the transistorpatents. In our regression this is true for 1953, but given the exceptional nature of the invention of thetransistor, it is fair to assume that this trend might have diverged in later years. Furthermore, it is notabsolutely clear from the historical records why Bell decided to license the transistor patents. If thelicensing decision was taken because of the expectation of great follow-on research, our estimate mightgive an upper bound on the effect. For example, Jack Morton, the leader of Bell Labs effort to producetransistors at scale, advocated the sharing of the transistor to benefit from advances made elsewhere.Source: http://www.computerhistory.org/siliconengine/bell-labs-licenses-transistor-technology/ (lastaccessed 2016-09-09)
34
Table 4: Auxiliary Regression
(1) (2) (3) (4) (5) (6) (7) (8)Pseudo
OutcomesPseudo Treatment Diff. Control Group
Base-line
From B-2Compa-nies
B-2Comp.
SameUSPC,diff IPC
SameIPC, diffUSPC
SameIPC, diffUSPC
IPC4-
Digit
Loose
Treatment -0.4 -0.1 -0.7 0.6∗ -0.1 -0.5 0.2 0.7(0.5) (0.2) (0.4) (0.3) (0.5) (1.7) (0.7) (0.8)
T x I(55-60)
2.0∗∗∗ 0.2 0.0 -0.3 -0.3 1.3 1.7∗∗∗ 1.5∗∗
(0.6) (0.1) (0.4) (0.5) (0.4) (0.8) (0.6) (0.6)Constant 18.3∗∗∗ 2.1∗∗∗ 16.7∗∗∗ 12.1∗∗∗ 13.3∗∗∗ 19.9∗∗∗ 17.9∗∗∗ 18.7∗∗∗
(1.2) (0.3) (0.6) (0.5) (0.3) (1.0) (1.0) (1.0)# treated 4533 4533 7901 42706 48583 4651 4512 4665Clusters 225 224 208 204 398 398 386 230Obs. 896556 877872 834108 761352 1340904 825984 701748 1301688
Notes: This table shows the results from a difference-in-difference estimation with years 1949 to 1953 as pre-treatmentperiod and 1954 to 1960 as treatment period. The variable "Treatment" is an indicator if a patent is published by therespective company before 1949 and therefore treated by the consent decree. As control patents we use all patents whichwere published in the US in the same publication year, USPC three digit primary class and with the same number ofcitations up to 1949. The companies under consideration are General Electric (GE), Westinghouse, International Stan-dard Electric (ISEC), Associated Electric Lab (AEL), Telefunken, Teletype Corporation, IBM and Radio Corporationof America (RAC). These are the companies with most patent publication in technologies were Bell had more than 500patents. Teletype Corporation is part of the Bell System but is explicitly excluded from the patent provision in theConsent Decree. The last two companies, IBM and RCA were subject to consent decrees with compulsory licensingof patents in 1956 and 1958, respectively. All coefficients are multiplied by 100 for better readability. In the "Loose"control group we coarsen the publication year to two year windows and sort all pre-citations in 10 equally sized bins.
35
Figure 11: Effect of compulsory licensing on subsequent citations among companiesthat were exempt from the consent decree
−1
0
1
2
3
4
Exc
ess
cita
tions
49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70
Filing year of citing patent
Notes: These graphs shows the estimated number of yearly excess citations by GeneralElectric Company, Radio Corporation of America and Westinghouse Electric Corporation,the three companies exempt from the consent decree, of patents affected ("Bell patents")relative to patents with the same publication year, in the same three-digit United StatesPatent Classification (USPC) primary class and with the same number of citations up to1949. To arrive at these estimates we regress the number of citations in each year on anindicator if the patent under consideration is affected by the consent decree and year fixedeffects. Instead of using overall pre-cites in the matching, we use the pre-cites of thesecompanies to adjust for differences in perceived quality. The dashed line represents the 90%confidence bands for the estimated coefficient. To adjust for the different number of controlpatents per treatment patent in each strata, we use the weights suggested by Iacus et al.(2009).
36
we repeat our analysis for foreign companies which could also use Bell patents for freebut which did not receive technical assistance and for companies that already had alicensing agreement in place. As expected, we find that the effects are smaller for thesetwo groups of firms.
Pseudo treatment: Citation substitution is small.
One possible interpretation of our estimates is that due to the free availability ofBell technology, companies substituted away from other, potentially more expensivetechnologies. If this is the case, we should find a negative impact of the consent decreeon citations of similar patents of other companies.39
To see if this is the case, we assign a pseudo treatment to the patents of GE, RCA,Westinghouse, which were part of the B2-agreement, and ITT. These companies wereamong the largest patenting firms in the 10 technology classes in which Bell had mostpatents between 1939 to 1949. Results are reported in Table 4, column (3). We find noeffect, implying that the citation substitution is either small or homogeneous to patentsof these companies and the control group. In Appendix D we report the counterfactualtreatment coefficients for several more companies and find no effect either.
For a second approach, we exploit the fact that a patent’s technology is classifiedtwice: once in the USPC system which has a technical focus and once in the IPC systemwhich reflects more closely the intended industry or profession (“usage”) (Lerner, 1994).In columns (4) and (5) of Table 4 we assign a pseudo-treatment to all patents that havethe same USPC class and the same IPC class as the Bell patents. As control goup weuse in column (4) patents with the same USPC, but a different IPC classificationas Bell patents. In column (5) we use as control patents with the same IPC, but adifferent USPC classification as Bell patents. We find a small, negative but statisticallyinsignificant effect. Again, this speaks in favor of limited citation substitution or -alternatively - a homogeneous citation substitution to all control groups. Arguablythe pseudo-treatment group is more similar to the Bell patents than the two controlgroups.
Effects are robust to different matching strategies.
In columns (6) to (8) of Table 4 and Figure 12 we report results from using severalalternative matching variables. In the main specification, we use the age (measured
39This approach is suggested by Imbens and Rubin (2015).
37
by the publication year), the technology (measured by USPC class) and the qualityof a patent (measured by the number of citations up to 1949). In column (6) we usepatents in the same IPC but different USPC class instead of using those in the sameUSPC class. In column (7) we match on the IPC classification. Finally, in column (8)we do a coarsened exact matching in order to match all Bell patents.40 In all threecases the size of the effects is similar to the one in the main specification and resultsare significant as long as a large share of the Bell patents is matched. In Figure 12 weshow the size of the treatment effects for different combinations of background variablesas proxy for age, technology and quality. On the vertical axis we plot the number ofmatched patents. The coefficient is mostly around 2.
4 Mechanism: Effect is driven by entry of start-upsoutside of telecommunication.
To inform antitrust policy, we need to understand the mechanism that underlies thepositive innovation effect of compulsory licensing. One could think of three possiblescenarios: First, reducing the royalty rate to zero may have increased the demandfor Bell’s technology (“price effect”). Second, the consent decree may have reducedpotential “bargaining failures” by taking away discretion to grant or not to grant alicense and by reducing ex-post hold up situations between Bell and inventors buildingon Bell’s technology. Third, as Bell allegedly used patents to exclude competitors in thefield of telecommunication, the compulsory licensing may have removed this “blockingeffect”. As we cannot observe any of these effects directly, we analyze subsamples thatare informative about the potential mechanisms.
If the price effect is the main driver of the positive innovation effect, we shouldexpect all firms to react to the compulsory licensing. If instead the main driver isthe reduction of bargaining failure we should expect start-ups to be more affected thanestablished companies. Prior research shows that small firms do not have a large enoughpatent portfolio to resolve disputes or to strike cross-licensing agreements. (Lanjouwand Schankerman, 2004; Galasso and Schankerman, 2010, 2015b). As cross-licensing
40Coarsened exact matching was proposed by Iacus et al. (2012). In this specification we match onone of five publication year categories that contain 2 years each and one of 10 prior-citation categories.
38
Figure 12: Treatment effects for different pre-treatment variables
1
2
3
4
Coe
ffici
ent
2500 3000 3500 4000 4500 5000
# of Bell patents matched
Significant on 10% level Insignificant
Notes: In this figure we plot the treatment effects of the consent decree for different matchingstrategies. The horizontal axis displays the number of matched Bell patents. In all regressionswe use a measure for the age, the technology and the quality of a patent for matching. Asmeasures for the age of a patent we alternatively use application year, publication year orboth. For technology, we use the USPC, the USPC with subclasses, the three and the fourdigit IPC. For quality we use the number of pre-citations as exact number, coarsened to stepsof five citations and an indicator for at least one citation prior to 1949. Empty symbols areinsignificant and full symbols are significant at 10% level.
39
was usually required as a prerequisite to be able to license patents from Bell, this islikely to have posed a larger handicap for small firms than for larger ones (AntitrustSubcommittee, 1958, p. 2685). Finally, if the blocking effect is the main driver, thenthe measured impact of compulsory licensing should be expected to be larger in Bell’score than in its non-core business. On the other hand, Bell allegedly blocked entry ofcompetitors also with other measures such as exclusive contracts. If this was the case,then imposing compulsory licensing may not have been enough to prevent foreclosureof the communication market.
4.1 Young and small companies start to cite Bell patentsmore.
In Table 5 we analyze the impact of the consent decree on citations, splitting citationsby the type of the citing company. We distinguish age, size and type of patent assignee.We define companies as young and small if their first patent was filed less than 10years before it cited the Bell patent and if they had less than 10 patents before 1949.41
We also distinguish different types of patent assignees (the legal entity to which thepatent is assigned) by looking at young and small companies and individual inventorstogether (column 2) and young and small companies separately (column 4). We findthat the increase in follow-on innovation is predominantely driven by young and smallcompanies entering the market and by individual inventors. Around 2/3 of the overallincrease comes from young and small assignees, but they are responsible for only 1/3of all citations to Bell patents (Column (2) and (3)).42 In column (4) we restrict tocitations of young and small companies, excluding individual inventors. We find thatthey account for around 50% of all increases although they are responsible for only20% of citations.
In Figure 13 we estimate the coefficients separately for different size and age groupsof assignees and find that the effect is driven mainly by companies and individualinventors without patents before 1949 and companies that are less than one year oldat the time of the citations.
These findings are consistent with the hypothesis that the consent decree reducedpotential bargaining failures. They suggest that patents act as a barrier of entry for
41We identify companies as all assignees that are never inventors. Our results are robust to definecompanies as having Inc., Corp., Co. or similar abbreviations in their name.
42Berechnung erläutern
40
Table 5: The effect of compulsory licensing on subsequent citations by company typeand field
(1) (2) (3) (4) (5) (6) (7) (8)Base Age and Size Former Bell? Fieldline Young &
SmallOth-ers
Y&SComp
No Yes Oth-ers
Communi-cation
Bell -0.4 -0.8∗∗∗ 0.4 -0.5∗∗ -1.2∗∗
0.8∗∗∗ -0.6∗∗∗
-0.2
(0.5) (0.3) (0.5) (0.2) (0.5) (0.2) (0.2) (0.3)Bell x I(55-60)
2.0∗∗∗ 1.4∗∗∗ 0.6 1.0∗∗∗ 2.5∗∗∗ -0.5∗∗
1.1∗∗∗ 0.3
(0.6) (0.3) (0.6) (0.3) (0.5) (0.2) (0.3) (0.2)Constant 18.3∗∗∗ 6.8∗∗∗ 12.4∗∗∗ 3.7∗∗∗ 17.2∗∗∗ 1.1∗∗∗ 5.2∗∗∗ 1.7∗∗∗
(1.2) (0.4) (1.0) (0.2) (1.2) (0.1) (0.7) (0.5)# treated 4533 4533 4533 4533 4533 4533 4533 4533Clusters 225 225 225 225 225 225 225 225Obs. 896556 896556 896556 896556 896556 896556 896556 896556
Notes: This table shows the results from a difference-in-differences estimation with the years 1949to 1953 as pre-treatment period and 1954 to 1960 as treatment period. The variable "Bell" is anindicator if a patent is published by a Bell System company before 1949 and therefore treated bythe consent decree. As control patents, we use all patents which were published in the US matchedby publication year, primary United States Patent Classification (USPC) technology class and thenumber of citations up to 1949. As dependent variable, we use all citations by other companies thanthe filing companies in column (1). We split these citations according to the age and size of thecompany subsequently. In column (2) we only use citations by young and small inventors, definedas having applied for their first patent no more than ten years ago and having less then ten patentsoverall. In column (3), we only use the citations of inventors that are neither young nor small and incolumn (4) of companies that are both young and small. In columns (5) and (6), we split the citationsaccording to whether inventors ever patented for Bell or ever were co-authors with Bell employees.In columns (7) and (8), we split citations by being inside or outside of the communication field.Allcoefficients are multiplied by 100 for better readability.
41
Figure 13: Sample split by characteristics of citing firm.
(a) By size of patent portfolio in 1949.
−.5
0
.5
1
1.5
Ex
cess
cit
atio
n
0 10 20 30 40 50 60 70 80 90 100 >100
Size of patent portfolio in 1949
(b) By age of company at citation.
−1
−.5
0
.5
1
Ex
cess
cit
atio
n
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 >20
Age of company at time of citing
Notes: These Sub-figures show results from a difference-in-differences estimation with theyears 1949 to 1953 as pre-treatment period and 1954 to 1960 as treatment period. As depen-dent variable, we use all citations by other companies than the filing companies with a specificsize of their patent portfolio (Sub-Figure (a)) and a specific company age (b) as indicated inthe figure.
start-ups and prevent follow-on innovation of start-ups.Our results are consistent with Galasso and Schankerman (2015b). The increase in
citations they observe is driven by citations by small companies of invalidated patentsof large companies. They interpret this as indication of a bargaining failure betweensmall innovators and large companies. Our overall results are also consistent withSampat and Williams (2015), who show that there is no effect of gene patents onfollow-on research in pharmaceutical and biotechnology industries. Pharmaceuticaland biotechnology are discrete product industries, so products are protected by fewpatents. As a consequence, bargaining should be considerably easier in these industriesthan in electronics where each product might be covered by several hundred patents.In addition, in these industries start-ups are usually well funded reducing the potentialimpact of financial constraints in the bargaining process.
One potential concern one might have is that the observed increase of citations byyoung and small companies following the consent decree was driven not by the consentdecree itself but by other secular changes at the Bell Laboratories. Historical accountssuggest that there was an exodus of important Bell researchers around the time of theconsent decree: Gordon Teal joined the by then small Texas Instruments Inc in 1953 toreturn to his native Dallas. At Bell, Teal invented a method to produce extremely puregermanium crystals that improved transistor performance tremendously. Similarly,
42
William Shockley, one of the inventors of the transistor, left Bell in 1956 for Palo Alto tofound Shockley Semiconductors. To rule out that other changes made entrepreneurshipmore attractive at the time of the consent decree, we separately look at citations frominventors who were at some point in time associated with Bell, but then patentedfor a different company, their co-inventors and all remaining unrelated inventors. Inour data, there are 4,477 former Bell inventors with around 29,700 patents. Theseinventors have in total 12,068 co-inventors who were never active at Bell and who filed97,389 patents in total. Results are reported in Columns (5) and (6) of Table 5. Wefind a positive effect on the citations of unrelated inventors and a negative effect onthe citations of related inventors. This pattern does not suggest that the increase infollow-on innovation was driven by former Bell inventors. If anything it suggests thatthe Bell inventors had preferential access to Bell technology prior to the consent decreeand that there was a strong increase from unrelated inventors afterwards.
4.2 No effect for communication technology, where Bell stayedthe dominant incumbent.
The consent decree imposed compulsory licensing but explicitly allowed Bell to continueas monopolist in the telecommunication market, despite allegations that Bell engagedin exclusionary practices. The consent decree also forced Bell to exit all businessesthat were not related to the telecommunication market. But according to Bell’s ownanalysis “the only effect (...) will be to (...) cease the manufacture of railroad signalingequipment and dispose of Westrex Corp. and Teletypesetter Corp”, three companiesconstituting jointly less than 0.4% of total turnover of the Bell system.(Antitrust Sub-committee, 1959, p.98)4344 Thus, the consent decree left Bell’s dominant position in thetelecommunication market unchanged and had only minor immediate other effects. Inthe words of a Western official the consent decree was a “blessing of the current set-up”(Antitrust Subcommittee, 1959, p.39). Business week wrote that “the Department ofJustice (...) in the guise of the enforcement of the Sherman Act has withdrawn 90%of a major manufacturing industry from the requirement of competition”. This lenientapproach gives us the opportunity to study how compulsory licensing interacts with
43There was an extensive discussion if Bell also has to cease the leasing and maintenance of privatecommunication equipment. It was decided in Bell’s favor that they do not have to do this. AntitrustSubcommittee (1959, p.98)
44Westrex, a sound recording subsidiary with a total 16 million revenue, was sold to Linton Industriesin 1958. Teletypesetter Corp. stayed part of the Bell System up to 1982.
43
Figure 14: Sorted by likelihood of being used in production of communication equip-ment
−.2
0
.2
.4
.6
.8
1
# E
xce
ss C
itat
ion
s
0 20 40 60 80
% used in production of telecommunication equipment SIC 3661
Notes: This figure shows the coefficients for the impact of the consent decree on followcitations sorted by the relevance of the citing patent for the production of telecommunicationequipment (SIC 3661 - “Telephone and Telegraph Apparatus”). Relevance is measured bythe likelihood that a patent is used in industry SIC 3661 using the data of Kerr (2008). Thesize of the dot signifies the number of Bell patents in a technology and a full dot implies thatthe coefficient is significant on the 10% level.
market structure.In Figure 14 we use the concordance of Kerr (2008) to sort all citing patents by
their likelihood that they are used in the production of telecommunication equipmentand find an almost linear negative relation between the closeness to communicationand excess citations. Almost all excess citations come from patents that have nothingto do with telecommunication. This is surprising because Bell had the largest numberof patents related to the production of communication equipment and thus we wouldexpect most follow-on innovation in this field. Reinforcing this point, Figure 15 showsthat after the consent decree, almost all additional citations resulted from patentsoutside of the industry “Telephone and Telegraph” (SIC 3661). A large part of the
44
Figure 15: Effect of compulsory licensing inside and outside of telecommunication bymost likely SIC industry classification.
3651 Audio and Video Equip
3711 Motor Vehicles
3829 Measuring and Controlling
Other industries < 50 patents
3629 Electrical Industrial Apparatus, Not Elsewhere Classified
3661 Telephones and Telegraphs
3541 Machine Tools, Metal Cutting Types
−.2
0
.2
.4
.6
Exc
ess
Cita
tions
50 100 500 1000 1500 2000
# of Bell patents
Notes: This Figure shows results from a difference-in-differences estimation with the years1949 to 1953 as pre-treatment period and 1954 to 1960 as treatment period. As dependentvariable, we use all citations by other companies than the filing companies classified by themost likely SIC classification of the citingpatent . To classify a patent by its most likelyindustry, we use the data of Kerr (2008) to assign to each USPC class the most likely four-digit SIC industry in which it is used. In Appendix D.1, we show the same exercise usingcitations classified by the IPC classification. A full dot signifies that a coefficient is significanton the 10% level.
45
Figure 16: # of citations to Bell patents inside and outside of communication.
(a) Up to 1949.
0
.1
.2
.3
.4
Av
erag
e #
of
cita
tio
ns
1945 1950 1955 1960 1965 1970
Filing year of the citing patents
Communication Equipment SIC 3661 Other SIC
(b) All Bell patents.
0
2
4
6
8
10
12
14
Av
erag
e to
tal
cita
tio
ns
1945 1950 1955 1960 1965 1970
Filing year of the cited patents
Communication Equipment SIC 3661 Other SIC
Notes: Sub-figure a) shows the average number of citations per year for all Bell patents thatare most likely used in the production of communication equipment (SIC 3661) and that areused in any other industry. Sub-figure b) shows the total number of citations of Bell patentsfiled in a particular year.
effect is driven by the industries “Measuring and Controlling” and other industrieswith a low number of patents.45
In column (7) of Table 5 we use only citations of young and small companies out-side the field of communication and in column (8) inside the field of communication.We find that the effect is driven exclusively by start-ups outside of communication.46
The small increase in citations in communication technology is consistent with the al-legation in the 1949 complaint that the market power of Bell foreclosed the market incommunication for start-ups and prevented innovation. This implies a causal link be-tween market structure and innovation. The results suggest that antitrust enforcementthat puts innovation first should be particularly concerned with exclusionary practicespreventing entry conditions of young companies (Baker, 2012; Wu, 2012).
To rule out alternative explanations such as a lack in potential follow-on innovationin the telecommunication market consider Figure 16. In Subfigure a) of Figure 16 weshow that before the consent decree for our main sample the average number of citationsto patents related to communication was at least as high as for patents outside of
45To assign each citing patent to its most likely industry we use the concordance of Kerr (2008). Weuse here the NBER subcategories defined by Hall et al. (2001). In the Appendix we additional showresults for the IPC classification and the conclusion is the same. According to Lerner (1994), it ismore industry and profession oriented than the technology oriented USPC classification. Furthermorewe show the results by technology of the cited patents.
46We use the most likely SIC code to determine the field of the citing patent
46
communication. In Subfigure b) we show that the absolute number of patent citationsbefore and after the consent decree were also almost identical. This suggests that afterthe consent decree, the number of follow-on innovations was not significantly lowerinside compared to outside of telecommunication. What is more, the historical accountssuggest that there was no lack of potential inventions inside of communication: By1945, Bell had all the technologies necessary to produce mobile phones and Bell indeedintroduced the first mobile phone system for cars in 1946 in St. Louis.47 Likewise, in1958 the Bell Labs were responsible for the laser that - together with optical fibers,developed in 1966 - would build the basis for fiber-optic communication. In 1962, BellLabs would go on to manufacture the first communication satellite, Telestar.
Both the public and antitrust officials were aware that because of Bell’s continueddominant position, compulsory licensing would only help start-ups outside the field oftelecommunication. A witness in hearings of the Congress put it succinctly: “whilepatents are made available to independent equipment manufacturers, no market fortelephone equipment is supplied (...) It is rather a useless thing to be permitted tomanufacture under patent if there is no market in which you can sell the producton which the patent is based.” And the committee concluded that “The patent andtechnical information requirement have efficacy only so far as they permit independentmanufacturers to avail themselves of patents in fields that are unrelated to the commoncarrier communication business carried on by the Bell System companies, and nothingmore.” Already on May 4, 1954 presiding Judge Barnes suggested that compulsorylicensing policy for reasonable rates is “only good window dressing” but would do nogood because Western had already “achieved an exclusive position (...) and liberallicensing would not permit competitors to catch up” in the communication business(Antitrust Subcommittee, 1959, pp. 108).
In the years after the consent decree, the Bell System faced repeated allegations ofexclusionary behavior. By the 1960s and 70s a range of new firms were eager to enterinto communication but Bell did everything to make it expensive or impossible forwould-be entrants to start (Wu, 2012). This led to a number of regulatory actions, forexample forcing interconnections of Bell’s telephone system to the entering competitorsMCI in 1971 which provided long distance services using microwave towers (Temin andGalambos, 1987; Gertner, 2012, p. 272). Eventually, the continued monopolization oftelecommunication by Bell resulted in the 1974 antitrust cases that ended with the
47The immediate further development by Bell was hampered by a too-small spectrum allocation ofthe FCC (Gertner, 2012).
47
break-up of the Bell System in 1983.
4.3 By opening up markets, antitrust increased US innovationin the long run
In the previous section we have established that the consent decree fostered the entryof start-ups outside the field of communication. However, it is not clear to what extentthis resulted in an increase of total innovation in the US economy. Understanding thelong-run impact of antitrust enforcement is important, because our analysis so-far onlyshowed that the increase in follow-on citations is measurable for the first seven years,speaking only in favor of a relatively short-lived impact of a large-scale intervention inpatent rights. If start-ups just re-directed investment from other companies, the effecton total innovation might have been zero. The historical set-up of the Bell case givesus the opportunity to look at the long-run effect of a consent decree on innovation.
For this purpose, we study the average increase in the number of patents in a tech-nology subclass with a compulsorily licensed Bell patent relative to a subclass without,separately for all patents and for communication technology (Moser and Voena, 2012;Moser et al., 2014), using the following regression equation
#Patentss,t = βt · I(Bell > 0)s + Controls+ εs,t (3)
where we control for USPC main line and USPC class-year fixed effects. Our sampleconsists of 307 classes with 6,302 subclasses of which 1,211 are treated.48
Figure 17a and Figure 17b show that starting in 1953, the number of patents intechnology classes where Bell patents were compulsorily licensed increased by around20% relative to subclasses without Bell patents. Table 6 shows that the increase isdriven by new companies entering the market and is concentrated outside of communi-cation technologies. This is tentative evidence that the fields in which Bell continued tooperate faced slower technological progress than technologies where entry of start-upswas possible. The increase in patenting starts already in 1953, two years before theincrease in citations to Bell patents. In 1953, Bell’s most important invention, the tran-sistor became available for licensing, spurring the creation of the computer industry.To make sure that the whole increase is not driven by this one exceptional invention,
48We exclude subclasses which did not have any patents at all before 1956 and we include onlypatent classes (four-digit IPC level) which contain subclasses that were treated and subclasses whichwere not.
48
Table 6: OLS regressions of patent applications per subclass and year by company type
(1) (2) (3) (4) (5) (6) (7)Type of Company Technology
Base-line
Young &Small
Oth-ers
Communi-cation
NotComm.
Com-puter
NotCom-puter
Treated 7.13∗∗∗ 1.59∗∗∗ 5.54∗∗∗ 5.26∗∗∗ 7.34∗∗∗ 3.35∗∗∗ 7.30∗∗∗
(0.58) (0.15) (0.45) (0.28) (0.12) (0.89) (0.61)Treated xI(54-60)
3.07∗∗∗ 1.76∗∗∗ 1.31∗∗∗ 1.30∗∗ 3.27∗∗∗ 4.24∗ 3.02∗∗∗
(0.34) (0.15) (0.22) (0.52) (0.28) (2.21) (0.34)Constant 1.49∗∗∗ 0.43∗∗∗ 1.06∗∗∗ 0.62∗∗∗ 1.59∗∗∗ 0.66∗∗∗ 1.53∗∗∗
(0.13) (0.04) (0.09) (0.04) (0.02) (0.17) (0.13)Clusters 235 235 235 13 222Observa-tions
132342 132342 132342 6048 126294 4032 128310
Notes: The dependent variable is the number of patent applications per (aggregated) subclassper year. A subclass is treated if it contains at least one Bell patent that was subject tocompulsory licensing. This treatment variable is interacted with an indicator that is 1 for theperiod from 1954 to 1960. The panel from 1949 to 1960 includes subclasses that had at leastone patent application between 1940 and 1949 and whose classes contain both treated anduntreated subclasses. The columns counting only patent applications by specific companytypes are based on the same definitions for young and small companies as table 5. Except forthe columns separating the effect on the communication field from that in other categories,Bell’s patents are not counted. The last column excludes all classes which contain transistor-related patents. Standard errors are clustered at the class level.* p<0.10, ** p<0.05, *** p<0.01.
49
Figure 17: Annual Treatment Effects on the Number of Patent Applications.
(a) Overall effect .
−5
0
5
10
#ex
cess
pat
ents
in
tre
ated
su
bcl
asse
s
35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69
Filing year
(b) Within communication and optics .
−5
0
5
10
#ex
cess
pat
ents
in
tre
ated
su
bcl
asse
s
35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69
Filing year
Notes: The dependent variable is the number of patent applications per (aggregated) subclassper year. A subclass is treated if it contains at least one Bell patent that was subject tocompulsory licensing. These figures show annual treatment effects for all patents (Sub-Figure(a)) and for communication technology (b), as shown in equation 3. We control for USPCmain line and USPC class-year fixed effects. Standard errors are clustered at the class level.
we analyze computer and non-computer patents separately in Columns (6) and (7).49
The effect is stronger for the computer subcategory, but the increase in patenting isalso significant without any computer patent. Thus, overall we find that driven by theentry of new companies, the consent decree led to a long-lasting increase in the scaleof innovation outside the field of communication, consistent with historical accountson the growth of electronics and computer in the 1950s and 1960s.
5 Conclusion
This paper shows that antitrust enforcement can increase innovation. We find that the1956 consent decree of Bell increased innovation by small and young companies buildingon Bell’s technology. The effects were concentrated outside the field of communicationwhere Bell continued operating. For large companies, patents do not seem to hin-der innovation, pointing to a functioning licensing market. This implies that patentsmainly hinder follow-on innovation of new and small companies. Our results suggesta causal effect of market structure on innovation because Bell’s continued presence incommunication hindered these start-ups from entering and innovating.
49A patent is a computer patent if it belongs to the technological subcategory Computer Hardwareand Software, Computer Peripherals and Information Storage
50
We study the impact of compulsory licensing for one of the largest inventors inUS history and the biggest inventor in computers and electronics at that time. Thebreadth of Bell’s innovative effort and the particular history of the consent decreeoffer the opportunity to cleanly identify the effect of patents and market structure oninnovation. Yet, due to the setting we cannot answer a number of questions that areimportant to translate our findings into policy:
First, our study identifies the detrimental effect of patents on cumulative innovation,but remains silent on how large the incentive effect of patents for innovation is. In ourparticular case, compulsory licensing did not appear to have had a strong negativeeffect on Bell’s patenting activities. This is consistent with Galasso and Schankerman(2015a) who show that large companies do not reduce their innovation activity butchange the direction of their research. It would be surprising if this was the norm.There are good reasons why the literature is inconclusive, but advances are necessary(Williams, 2015).
Second, we analyze a very important antitrust case from the 1950s. It is thereforeunclear if the size of the effects of compulsory licensing would be similar today. Usinga historical setting allows to draw on a large number of detailed historical accountssuch as thousands of pages of hearings in the Congress and to conduct a long runevaluation many years after the case. Yet, Jaffe and Lerner (2011) suggest that manynegative effects of the patent system are related to regulatory changes surrounding theestablishment of the Court of Appeals for the Federal Circuit in 1982. The reformsled to a significant broadening and strengthening of the rights of patent holders andconsequently to a surge in the number of patents granted and an increase in the damagesgranted in case of infringement. As a consequence, the effects of compulsory licensingmight be larger today.
Third, we look at compulsory licensing in isolation from changes in the marketstructure. However, compulsory licensing is often used in merger cases where marketpower is increased endogenously (Delrahim, 2004; Sturiale, 2011). Our paper suggeststhat market power might reduce the benefits of compulsory licensing by acting exclu-sionary, defeating the purpose of any compulsory licensing provision. More empiricalstudies are needed to assess whether our result of a negative effect of market power oninnovation holds in merger cases.
Fourth, a main conclusion of our study is that antitrust should foster entry toincrease innovation. Yet, it is unclear how such a policy can be designed. Today, several
51
antitrust scholars think that exclusion should play a larger role in antitrust enforcementin particular because of its influence on innovation (Baker, 2012; Wu, 2012). Our studyseconds this view, to the extent that the entry of start-ups is possible. How to designan entry enhancing policy learning from past interventions is a fruitful area of futureresearch.
52
References
Akcigit, U. and Kerr, W. R. (2010). Growth through heterogeneous innovations.NBER Working Paper No. 16443.
Alcacer, J. andGittelman, M. (2006). Patent citations as a measure of knowledgeflows: The influence of examiner citations. The Review of Economics and Statistics,88 (4), 774–779.
—, — and Sampat, B. (2009). Applicant and examiner citations in US patents: Anoverview and analysis. Research Policy, 38 (2), 415–427.
Antitrust Subcommittee (1958). Consent decree program of the Department ofJustice. American Telephone & Tel. Subcommittee - hearings before the AntitrustSubcommittee. U.S. House Committee on the Judiciary, Committee on the JudiciarySerial No. 9, Part 2, Volume 2.
Antitrust Subcommittee (1959). Consent decree program of the Departmentof Justice. Committee on the Judiciary, House of Representatigves, Eighty-SixthCongress, First Session.
Arora, A., Belenzon, S. and Patacconi, A. (2015). Killing the golden goose? thedecline of science in corporate r&d. NBER Working Paper No. 20902.
Baker, J. B. (2012). Exclusion as a core competition concern. Antitrust Law Journal,78, 527.
Bessen, J. and Maskin, E. (2009). Sequential innovation, patents, and imitation.The RAND Journal of Economics, 40 (4), 611–635.
Boldrin, M. and Levine, D. K. (2007). Against intellectual monopoly.
Delrahim, M. (2004). Forcing firms to share the sandbox: Compulsory licensing ofintellectual property rights and antitrust. European Business Law Review, 15 (5),1059–1069.
Galasso, A. and Schankerman, M. (2010). Patent thickets, courts, and the marketfor innovation. The RAND Journal of Economics, 41 (3), 472–503.
53
— and — (2015a). Patent rights and innovation by small and large firms. NBERWorking Paper No. 21769, (21769).
— and — (2015b). Patents and cumulative innovation: Causal evidence from thecourts. The Quarterly Journal of Economics, 130 (1), 317–369.
Gertner, J. (2012). The idea factory: Bell Labs and the great age of American inno-vation. Penguin.
Gordon, R. J. (2016). The rise and fall of American growth: The US standard ofliving since the civil war. Princeton University Press.
Green, J. R. and Scotchmer, S. (1995). On the division of profit in sequentialinnovation. The RAND Journal of Economics, 26 (1), 20–33.
Grindley, P. C. and Teece, D. J. (1997). Licensing and cross-licensing in semi-conductors and electronics. California Management Review, 39 (2), 8–41.
Hall, B. H., Jaffe, A. B. and Trajtenberg, M. (2001). The nber patent citationdata file: Lessons, insights and methodological tools. NBER Working Paper No.8498.
Helpman, E. (1998). General purpose technologies and economic growth. MIT press.
Iacus, S. M., King, G. and Porro, G. (2009). Cem: Software for coarsened exactmatching. Journal of Statistical Software, 30 (9), 1–27.
—, — and — (2012). Causal inference without balance checking: Coarsened exactmatching. Political Analysis, 20, 1–24.
Imbens, G. W. and Rubin, D. B. (2015). Causal inference in statistics, social, andbiomedical science. Cambridge University Press.
Jaffe, A. B. and Lerner, J. (2011). Innovation and its discontents: How our bro-ken patent system is endangering innovation and progress, and what to do about it.Princeton University Press.
Kerr, W. R. (2008). Ethnic scientific communities and international technology dif-fusion. The Review of Economics and Statistics, 90 (3), 518–537.
54
Kogan, L., Papanikolaou, D., Seru, A. and Stoffman, N. (2012). Technologicalinnovation, resource allocation, and growth. NBER Working Paper No. 17769.
Lanjouw, J. O. and Schankerman, M. (2004). Protecting intellectual propertyrights: Are small firms handicapped? Journal of Law and Economics, 47 (1), 45–74.
Lerner, J. (1994). The importance of patent scope: An empirical analysis. The RANDJournal of Economics, 25, 319–333.
Moser, P. and Voena, A. (2012). Compulsory licensing: Evidence from the tradingwith the enemy act. American Economic Review, 102 (1), 396–427.
—, — and Waldinger, F. (2014). German jewish emigres and US invention. Amer-ican Economic Review, 104 (10), 3222–3255.
Mowery, D. C. (2011). Federal policy and the development of semiconductors, com-puter hardware, and computer software: A policy model for climate change r&d?In Accelerating Energy Innovation: Insights from Multiple Sectors, University ofChicago Press, pp. 159–188.
Nelson, R. (1962). The link between science and invention: The case of the tran-sistor. In The rate and direction of inventive activity: Economic and social factors,Princeton University Press, pp. 549–584.
Nelson, R. R. (1959). The simple economics of basic scientific research. Journal ofPolitical Economy, 67 (3), 297–306.
Noll, A. (1987). Bell system r&d activities. Telecommunications Policy, 11 (2), 161– 178.
Rosenberg, N. (1990). Why do firms do basic research (with their own money)?Research Policy, 19 (2), 165–174.
Sampat, B. andWilliams, H. L. (2015). How do patents affect follow-on innovation?evidence from the human genome. NBER Working Paper No. 21666.
Segal, I. andWhinston, M. D. (2007). Antitrust in innovative industries. AmericanEconomic Review, 97 (5), 1703–1730.
55
Sturiale, J. E. (2011). Compulsory licensing of intellectual property as merger rem-edy: A decision-theoretic approach. Louisiana Law Review, 72, 605.
Temin, P. and Galambos, L. (1987). The fall of the Bell system: A study in pricesand politics. Cambridge University Press.
Waller, S. W. and Sag, M. (2014). Promoting innovation. Iowa Law Review, 100,2223.
Wessner, C. W. et al. (2001). Capitalizing on new needs and newopportunities: Government-industry partnerships in biotechnology and in-formation technologies. National Academies Press, chapter 2 available athttp://www.nap.edu/read/10281/chapter/11.
Williams, H. L. (2015). Intellectual property rights and innovation: Evidence fromhealth care markets. In Innovation Policy and the Economy, Volume 16, Universityof Chicago Press.
Wu, T. (2012). Taking innovation seriously: Antitrust enforcement if innovation mat-tered most. Antitrust Law Journal, 78 (2), 313–328.
56
A Additional Graphs
A.1 Evidence on the Meeting on March 3, 1954
Figure 18: The meeting on March 3, 1954
A.2 The scale of innovation – citation-weighted patents
In Figure 19 and Table 7 we repeat the analysis on the scale of innovation with citation-weighted patents as outcome variable. We find very similar results as with unweightedpatents.
57
Figure 19: Annual Treatment Effects on the Number of Citation-Weighted Patents
−20
0
20
40
60
#exc
ess
pate
nts
in tr
eate
d IP
C g
roup
s
40 45 50 55 60 65
Application year
58
Table 7: OLS regressions of citation-weighted patents per subclass and year by com-pany type
Forward citations per yearBaseline New Young Old Small Large Y & S
Treated 55.16∗∗∗ 2.13∗∗∗ 3.48∗∗∗ 4.54∗∗∗ 3.58∗∗∗ 4.44∗∗∗ 2.95∗∗∗
(5.04) (0.21) (0.31) (0.36) (0.34) (0.35) (0.28)Treated x I(54-60) 12.37∗∗∗ 0.23∗∗∗ 1.49∗∗∗ 0.37∗∗ 1.39∗∗∗ 0.46∗∗∗ 1.39∗∗∗
(2.33) (0.08) (0.19) (0.15) (0.18) (0.16) (0.17)Constant 32.05∗∗∗ 1.29∗∗∗ 2.35∗∗∗ 2.29∗∗∗ 2.38∗∗∗ 2.26∗∗∗ 2.05∗∗∗
(1.42) (0.05) (0.09) (0.09) (0.10) (0.09) (0.08)Clusters 307 307 307 307 307 307 307Observations 49236 49236 49236 49236 49236 49236 49236
Notes: The dependent variable is the number of forward citations received by patents per subclass(IPC group) per application year of the cited patent (without self-citations). A subclass is treated ifit contains at least one Bell patent that was subject to compulsory licensing. This treatment variableis interacted with an indicator that is 1 for the period from 1954 to 1960. Columns 2 to 7 count onlypatent applications by specific company types, which are defined as in table 5. Standard errors areclustered at the class level (4-digit IPC).* p<0.10, ** p<0.05, *** p<0.01.
B Additional Counterfactual Regressions
There were two other groups of companies that were to a lesser degree influenced by theconsent decree: foreign companies and companies that already had licensing agreementsin place. Foreign companies and companies in US controlled by foreign companies couldlicense for free but did not receive any technical description or assistance from Bell.50
Companies that licensed already before the consent decree from Bell were obviouslyable to get a license and build on the work of Bell and therefore seem to a lesserdegree influenced by compulsory licensing. All companies with a license agreement arelisted in the hearing documents (Antitrust Subcommittee, 1958, p. 2758). In Table8 we re-estimate the equation (2) using as the dependent variable the citations fromall companies (column 1), from the exempt B2-companies (column 2), from foreigncompanies (column 3) and from companies that had a license before the consent decree(column 4). In the last column we use data on all companies that did not have a licensefrom Bell. We do not find a measurable effect for all the different types of non-treated
50Verbatim in the consent decree “The defendants are each ordered and directed (...) to furnishto any person domiciled in the United States and not controlled by foreign interests (...) technicalinformation relating to equipment (...)” .
59
companies and a positive effect for companies that had no license before the consentdecree.
Table 8: The effect of compulsory licensing on subsequent citations of unaffected com-panies
(1) (2) (3) (4) (5)Base-line
Exemptcompanies
Foreigncompanies
License Nolicense
Bell -0.29 -0.18 -0.10 0.04 -0.05(0.66) (0.23) (0.10) (0.08) (0.51)
Bell x I(54-60)
1.87∗∗∗ 0.31∗ 0.11 0.17∗ 1.27∗∗
(0.63) (0.17) (0.15) (0.09) (0.52)Constant 20.93∗∗∗ 2.82∗∗∗ 0.93∗∗∗ 0.94∗∗∗ 16.24∗∗∗
(1.09) (0.34) (0.08) (0.15) (0.74)Adj R2 0.00 0.00 0.01 0.00 0.00Clusters 228 228 228 228 228Obs. 1301196 1301196 1301196 1301196 1301196
Notes: This table shows the results from a difference-in-difference estimation with years 1949 to 1953as pre-treatment period and 1954 to 1960 as treatment period. The variable "Bell" is an indicatorif a patent is published by a Bell System company before 1949 and therefore treated by the consentdecree. As control patents we use all patents which were published in the US matched by publicationyear, four digit IPC class and the number of citations up to 1949. As dependent we use in the firstcolumn all citations by other companies than the filing company, in the second column we use allcitations of companies exempt from the consent decree (GE, RCA, Westinghouse & ITT) and in thethird column all citations of foreign companies. In the fourth column we use citations of companieswhich had no licensing agreement with any Bell company prior to the consent decree and in the lastcolumn we look at the citation of companies which had a licensing agreement. All coefficients aremultiplied by 100 for better readability.
60
Figure 20: Patenting over time: Bell System and B2 companies without RCA.
.5
1
1.5
2
# P
aten
ts −
no
rmal
ized
to
av
erag
e o
f 46
−48
1945 1950 1955 1960 1965 1970
Filing year
Bell
Synthetic Bell
B2 Companies
General Electric
Westinghouse
Companies in field of Bell
Notes: In this figure we compare Bell’s total patenting to the synthetic Bell, the number ofpatents filed by the B2 companies (General Electric, Westinghouse, RCA and ITT), GeneralElectric and Westinghouse separately and all companies that existed before 1949 and had atleast 100 patents in any field in which Bell was active. The number of patents are normalizedto the average number of patents from 1946, 1947 and 1948. We show General Electric andWestinghouse seperately, because RCA had a consent decree involving patents in 1958 andthus might have changed its behavior.
61
Figure 21: Hazard rate for patent publication by filing year
(a) Application year 1951
0
.05
.1
.15
Sh
are
of
pat
ents
pu
bli
shed
49 50 51 52 53 54 55 56 57 58 59 60
Publication year in semester
Bell
Control
(b) Application year 1956
0
.05
.1
.15
.2
.25
Sh
are
of
pat
ents
pu
bli
shed
49 50 51 52 53 54 55 56 57 58 59 60
Publication year in semester
Bell
Control
62
C Mechanisms: Additional results
Patenting behavior of Bell relative to comparable companies
Hazard rate for patent publication for filing years 1951 and1956
Effect by technology
In this section we use the NBER technology subcatory classification of the USPCclasses to show that there is no effect in communication technology. In Figure 22 weshow separate estimates for the treatment effect of the consent decree for patents inall NBER technology subclasses where Bell had more than 50 patents and split by thetechnology subclass of the citing patent. In particular, the subclass Electrical Devicesshows a large increase in terms of cited and citing patents. In contrast, in the field ofcommunication, patents experience only a small insignificant increase and the numberof citations from communication patents even decreases.[Unklar] The drawback of theNBER classification is that the definition of communication technology also comprisesthe technologies such as radar (USPC 342). [Die Figure ist nicht ausreichend erklärt.Wenn ich es Recht sehe, ist nur TEil a) erklärt.]
Inventors and their Co-Inventors
The results so far point towards the entry of new companies as the mechanism in-creasing innovation after the consent decree. One reason for more entry might be thatBell alumni such as William Shockley and Gordon Teal left Bell and started their owncompany to profit more from the now freely available technology of Bell. Then, the con-sent decree might just have shifted follow-on innovation from Bell to young companieswithout increasing the level of innovation. We investigate this channel by separatelyanalyzing the impact of the consent decree on citation of inventors who were at onepoint in time associated with Bell, but then patented for a different company, and theirco-inventors. In our data, there are 4,477 former Bell inventors with around 29,700patents. These inventors have in total 12,068 co-inventors who were never active atBell and who filed 97,389 patents in total.
We find that the effect is driven by new inventors unrelated to Bell. Figure 24ashows the coefficient estimate of our main specification when using only citations of
63
Figure 22: Effect of compulsory licensing on subsequent citations
(a) By technology subcategory
Communications
Power Systems
Material Processing & Handling
Misc−MechanicalMisc−chemical
Electrical Lighting
Misc−Others
Miscellaneous−Elec
Electrical Devices
Measuring & Testing
Metal Working
−.2
0
.2
.4
.6
.8
# E
xce
ss C
itat
ion
s
50 100 500 1000 2000
# Bell patents
(b) By IPC classification
MACHINE TOOLSHANDLING THIN OR FILAMENTARY MATERIALMEASURING; TESTING
MUSICAL INSTRUMENTS, ACOUSTICS
GENERATION, CONVERSION OR DISTRIBUTION OF ELECTRIC POWERELECTRIC COMMUNICATION
MECHANICAL METAL−WORKINGBRAIDING; LACE−MAKING; KNITTING
HOROLOGY
BASIC ELECTRIC ELEMENTSBASIC ELECTRONIC CIRCUITRY
−60
−40
−20
0
20
40
# E
xce
ss C
itat
ion
s
50 100 500 1000 5000
# Bell patents
(c) By most likely SIC industry classification
Laboratory Apparatus
Computer Equipment
Communications Equipment
Electronic ComponentsGeneral Industrial Machinery
Industry groups <50 Bell patents
Plastics
Electrical Industrial Apparatus
Household Appliances
−.02
0
.02
.04
.06
.08
# E
xces
s C
itatio
ns
10 100 500 1000 5000
# Bell patents
(d) By likelihood to be used in production of com-munication equipment
0
.005
.01
.015
.02
# E
xce
ss C
itat
ion
s
0 20 40 60 80
More than % used in production of telecommunication equipment SIC 3661
Notes: This figure shows the coefficient for the impact of the consent decree on citationsfor patents in all IPC 3 classes where Bell had in more than 10 patents. A full dotsignifies that the coefficient is significant on the 10% level.
64
Figure 23: Effect of compulsory licensing on subsequent citations across patent sub-classes
Coating
Misc−chemical
CommunicationsComputer Hardware & Software
Measuring & Testing
Material Processing & Handling
Apparel & Textiles
Misc−Others
Miscellaneous−Elec
Electrical Devices
Electrical Lighting
Power Systems
Metal Working
Misc−Mechanical
0
2
4
6
# E
xce
ss C
itat
ion
s
50 100 500 1000 2000
# Bell patents
Notes: This figure shows the coefficient for the impact of the consent decree on citationsfor patents in all IPC 3 classes where Bell had in more than 10 patents. A full dotsignifies that the coefficient is significant on the 10% level.
65
inventors and co-inventors as the dependent variable. While there are some excesscitations in the years leading to the consent decree, this effect gradually declines andbecomes insignificant around the time of the decree. This is in line with our esti-mates on self-citations: apparently, the access to Bell’s direct knowledge became lessimportant. When we subtract the inventor and co-inventor citations from the overallcitations, we find that the estimates are qualitatively identical to our main estimates(Figure 24b). Thus, the effect seems to indeed be driven by the entry of new inventors.
The scale of innovation increases
There are two potential reasons why the innovation based on Bell patents increasedfollowing the consent decree. One is that the consent decree stimulated an increaseof the absolute scale of innovation. Another is that the compulsory licensing inducedfirms to substitute more costly technologies with Bell technologies that were now freeof charge. Arguably, only the first alternative would speak for a long-lasting effect ofBell’s antitrust case on the US economy.
To investigate this question we follow Moser and Voena (2012) and compare thechange in absolute number of patents before and after the consent decree in technologysubclasses with at least one Bell patent to subclasses without. Our sample consists of307 classes with 4103 subclasses of which 977 are treated.51
To see if the scale of innovation increased we estimate the following model
#Patentsi,t = βt · Treatedi,t + Controls+ ε (4)
where the dependent variable is the number of patent applications per subclass ina year.52 Following the literature we use an indicator which is equal to one if thereis at least one affected Bell patent in the subclass. As controls we include technologysubclass and a class-specific year fixed effects. We find that the consent decree increasedthe scale of innovation in the US economy. In Figure 25, we show the annual treatmenteffects using the number of patent applications in a subclass as outcome. The effectstarts in 1953 and shows no sign of abating.
51We exclude subclasses which did not have any patents at all before 1956 and we include onlypatent classes (4-digit IPC level) which contain subclasses that were treated and subclasses whichwere not.
52We exclude Bell System patents for the entire sample. Patent applications are weighted accordingto the number of subclasses they are assigned to. If a patent is assigned to two subclasses, for example,it increases the size of each class by 0.5, such that the total increase is 1 for each patent.
66
Figure 24: Former Bell inventors and Co-Inventors
(a) Annual Treatment Effects on the Citations from Inventors and Co-Inventors
(b) Annual Treatment Effect without Co-Inventor Citations
67
Figure 25: Annual Treatment Effects on the Number of Patent Applications
−2
0
2
4
6
#exc
ess
pate
nts
in tr
eate
d IP
C g
roup
s
40 45 50 55 60 65
Application year
68
Table 9: OLS regressions of patent applications per subclass and year by company type
Patent applications per yearBaseline New Young Old Small Large Y & S
Treated 8.02∗∗∗ 2.13∗∗∗ 3.48∗∗∗ 4.54∗∗∗ 3.58∗∗∗ 4.44∗∗∗ 2.95∗∗∗
(0.61) (0.21) (0.31) (0.36) (0.34) (0.35) (0.28)Treated x I(54-60) 1.86∗∗∗ 0.23∗∗∗ 1.49∗∗∗ 0.37∗∗ 1.39∗∗∗ 0.46∗∗∗ 1.39∗∗∗
(0.27) (0.08) (0.19) (0.15) (0.18) (0.16) (0.17)Constant 4.64∗∗∗ 1.29∗∗∗ 2.35∗∗∗ 2.29∗∗∗ 2.38∗∗∗ 2.26∗∗∗ 2.05∗∗∗
(0.17) (0.05) (0.09) (0.09) (0.10) (0.09) (0.08)Clusters 307 307 307 307 307 307 307Observations 49236 49236 49236 49236 49236 49236 49236
Notes: The dependent variable is the number of patent applications per subclass (IPC group) peryear, excluding Bell System patents. A subclass is treated if it contains at least one Bell patent thatwas subject to compulsory licensing. This treatment variable is interacted with an indicator that is 1for the period from 1954 to 1960. Columns 2 to 7 count only patent applications by specific companytypes, which are defined as in table 5. Standard errors are clustered at the class level (4-digit IPC).* p<0.10, ** p<0.05, *** p<0.01.
To quantify the effect, Table 9 shows the results for the following difference-in-differences specification
#Patentsi,t = β · Treatedi · I[1954 − 1960] + Controls+ ε (5)
where Treatedi is an indicator if the subclass i contains at least one compulsory licensedBell patent. The effect of the treatment variables is significant and positive in allregressions. Similarly to the citation regressions, the effect is mainly driven by youngand small companies speaking in favor of market entry as causal mechanism. In figure19 and table 7 in Appendix A.2 we use citation-weighted patents as dependent variableto account for the quality of follow-up patents. We find very similar effects.
69
Figure 26: # of citations to Bell’s transistor patents.
(a) Up to 1949.
0
.1
.2
.3
.4
.5
Ave
rage
# o
f cita
tions
1945 1950 1955 1960 1965 1970
Filing year of the citing patents
Transistor patents Others
(b) All Bell patents.
02468
1012141618202224262830323436
Ave
rage
tota
l cita
tions
1945 1947 1949 1951 1953
Filing year of the cited patents
Transistor patents Others
Notes: Sub-figure a) shows the average number of citations per year for all transistor-relatedBell patents and all other Bell patents. Sub-figure b) shows the total number of citations ofBell patents filed in a particular year.
Table 10: Auxiliary Regressions
(1) (2) (3) (4) (5) (6) (7) (8) (9)Pseudo
OutcomesPseudo Treatment Diff. Control Group
Base-line
From B-2Companies
B-2Compa-nies
SameUSPC, diff
IPC
Same IPC,diff USPC
Same IPC,diff USPC
FullUSPC
IPC4-
Digit
Loose
Treatment -0.4 -0.1 -0.7 0.6∗ -0.1 -0.5 0.2 0.7(0.5) (0.2) (0.4) (0.3) (0.5) (1.7) (0.7) (0.8)
T x I(55-60) 2.0∗∗∗ 0.2 0.0 -0.3 -0.3 1.3 1.7∗∗∗ 1.5∗∗
(0.6) (0.1) (0.4) (0.5) (0.4) (0.8) (0.6) (0.6)Constant 18.3∗∗∗ 2.1∗∗∗ 16.7∗∗∗ 12.1∗∗∗ 13.3∗∗∗ 19.9∗∗∗ 17.9∗∗∗ 18.7∗∗∗
(1.2) (0.3) (0.6) (0.5) (0.3) (1.0) (1.0) (1.0)# treated 4533 4533 7901 42706 48583 4651 4512 4665Clusters 225 224 208 204 398 398 386 230Obs. 896556 877872 834108 761352 1340904 825984 701748 1301688
Notes: This table shows the results from a difference-in-difference estimation with years 1949 to 1953 as pre-treatmentperiod and 1954 to 1960 as treatment period. The variable "Treatment" is an indicator if a patent is published by therespective company before 1949 and therefore treated by the consent decree. As control patents we use all patents whichwere published in the US in the same publication year, USPC three digit primary class and with the same number ofcitations up to 1949. The companies under consideration are General Electric (GE), Westinghouse, International Stan-dard Electric (ISEC), Associated Electric Lab (AEL), Telefunken, Teletype Corporation, IBM and Radio Corporationof America (RAC). These are the companies with most patent publication in technologies were Bell had more than 500patents. Teletype Corporation is part of the Bell System but is explicitly excluded from the patent provision in theConsent Decree. The last two companies, IBM and RCA were subject to consent decrees with compulsory licensing ofpatents in 1956 and 1958, respectively. All coefficients are multiplied by 100 for better readability.
70
Average citations to Bell’s transistor patents
D Auxiliary Analysis and Robustness: AdditionalResults
Dropping the most important patents does not affect the results
One threat for identification of the effect is that the government singled out AT&Tfor compulsory licensing because of Bell’s outstanding inventions. If public officialsenacted the consent decree as a reaction to the great inventions of the Bell Labs, theeffect of the consent decree should not be observable for patents that were “by chance”part of the consent decree. To see if this is the case we drop in the last three column ofTable 2 all patents related to the transistor, the top 5% and top 10% of all Bell Labspatents measured by their citations up to 1949 and repeat the analysis. The effects arenot significantly different from the effects in the main specification.
Counterfactual: Citations to patents of unaffected companies stay stable
Similarly, companies that were not subjected to compulsory licensing should not seetheir citations increase - even if they were active in the same technologies as Bell. Inthe following we look at citations to the patents of the five largest companies that wereactive in the same technologies but were not subject to the Bell or any other consentdecree involving patent licensing from 1956 to 1960. We find no effect on the patentsof these untreated companies.
In Table 11 we look at the 7 largest patenting companies in the 10 USPC classesin which Bell had most patents from 1939 to 1949.53 These companies are RCA, Gen-eral Electric, Westinghouse, Teletype, Associated Electric Lab, International StandardElectric Corp and Telefunken. Two of these companies are different: Although TeletypeCorp was part of the Bell System its patents were excluded from compulsory licensingbecause Bell agreed to divest it within 3 years (which did not happen) and RCA had
53These technologies by are USPC class 178 - Telegraphy | 313 - Electric lamp and discharge devices| 330 - Amplifiers | 333- Wave transmission lines and networks | 379 - Telephonic communications |315 - Electric lamp and discharge devices: systems | 324 - Electricity: measuring and testing | 335- Electricity: magnetically operated switches, magnets, and electromagnets | 340 - Communications:electrical | 370 - Multiplex communications
71
Table 11: The effect of pseudo treatments
(1) (2) (3) (4) (5) (6) (7) (8) (9)Counterfactual Consent decrees
AT&T GE Westing-house
ISEC AEL Tele-funken
Teletype IBM RCA
Treatment -0.2 -0.3 -0.6 -0.8 -0.5 -1.8 0.1 -0.5 1.1(0.6) (0.5) (0.5) (1.7) (1.5) (1.2) (1.2) (1.2) (0.9)
I(54-60) -8.3∗∗∗ -6.5∗∗∗ -6.0∗∗∗ -10.0∗∗∗ -7.2∗∗∗ -8.2∗∗∗ -3.2∗∗∗ -3.5∗∗∗ -4.7∗∗∗
(0.3) (0.2) (0.2) (0.7) (0.7) (0.6) (0.5) (0.6) (0.3)Treat x I(54-60) 1.4∗∗ -0.1 0.3 -0.4 -1.5 0.8 0.7 3.2∗∗ -0.6
(0.5) (0.4) (0.5) (1.5) (1.5) (1.2) (1.1) (1.2) (0.8)Constant 18.8∗∗∗ 16.9∗∗∗ 16.4∗∗∗ 20.9∗∗∗ 14.3∗∗∗ 16.7∗∗∗ 8.6∗∗∗ 11.6∗∗∗ 15.2∗∗∗
(0.3) (0.3) (0.3) (0.7) (0.8) (0.7) (0.6) (0.7) (0.3)Adj R2 0.01 0.01 0.00 0.01 0.01 0.01 0.00 0.00 0.00Obs. 1269407 985847 805154 204697 72947 165308 63563 146421 625056
Notes: This table shows the results from a difference-in-difference estimation with years 1949 to 1953 as pre-treatmentperiod and 1954 to 1960 as treatment period. The variable "Treatment" is an indicator if a patent is published by therespective company before 1949 and therefore treated by the consent decree. As control patents we use all patents whichwere published in the US in the same publication year, USPC three digit primary class and with the same number ofcitations up to 1949. The companies under consideration are General Electric (GE), Westinghouse, International Stan-dard Electric (ISEC), Associated Electric Lab (AEL), Telefunken, Teletype Corporation, IBM and Radio Corporationof America (RAC). These are the companies with most patent publication in technologies were Bell had more than 500patents. Teletype Corporation is part of the Bell System but is explicitly excluded from the patent provision in theConsent Decree. The last two companies, IBM and RCA were subject to consent decrees with compulsory licensing ofpatents in 1956 and 1958, respectively. All coefficients are multiplied by 100 for better readability.
a compulsory licensing agreement in 1958. We also add IBM that had a compulsorylicensing agreement in 1956. For all companies not affected by the consent decree thereis no measureable effect. We find a positive coefficient and significant effects for RCA.We analyze the importance of these and all others consent decrees in the US history ina companion paper. [die Ergebnisse kann ich in der Tabelle nicht sehen. Stimmt dieTabelle oder verstehe ich da etwas falsch?]
Citation substitution is small and only occurs immediately after the decree.
One possible interpretation of our estimate is that due to the free availability of Belltechnology, companies substituted away from other, potentially more expensive tech-nologies. If this is the main driver of our estimates, the coefficient measures the relativeincrease of the usage of Bell patents compared to the control patents. If treatment andcontrol patents are horizontally differentiated this suggests a change in the directionof innovation but not an absolute increase in follow-on innovation.
To see if this is the case, we compare control patents that are more likely to actas substitutes for the treatment patents with patents that are less likely to act assubsitutes. To this end we exploit the fact that a patent’s technology is classified
72
Table 12: The effect of compulsory licensing on subsequent citations
(1) (2) (3) (4) (5) (6)Controls Baseline Counterfactual Different Control GroupsUSPC same same different same same differentIPC different same same different sameTreatment -0.4 0.6∗ -0.1 -0.3 0.3 -0.5
(0.5) (0.3) (0.2) (0.5) (0.7) (0.6)T x I(55-60) 2.0∗∗∗ -0.3 -0.3 1.6∗∗∗ 1.8∗∗ 1.3∗
(0.6) (0.5) (0.2) (0.5) (0.8) (0.7)Constant 15.1∗∗∗ 11.2∗∗∗ 12.2∗∗∗ 14.6∗∗∗ 13.9∗∗∗ 16.6∗∗∗
(0.0) (0.2) (0.2) (0.0) (0.1) (0.3)Adj R2 0.25 0.07 0.05 0.25 0.38 0.19Clusters 225 204 398 219 211 398Obs. 896556 761352 1340904 636564 297660 825984
twice: once in the USPC system that has a technical focus and once in IPC thatreflects more closely the intended industry or profession Lerner (1994). We define threemutually exclusive control groups: untreated patents that have 1) the same USPC andthe same 3-digit IPC primary classification, 2) the same USPC but a different IPCclassification and 3) a different USPC but the same IPC classification as Bell patents.Arguably control group 1) is more similar to the treatment patents than 2) and 3) areless similar to the treatment patents. In particular control group 3) is not containedin our original control group.
In Column 2-3 of Table 12 we assign a treatment indicator to Group 1) and useGroup 2) and Group 3) as control group. We find a small, negative but statisticallyinsignificant difference between the different control groups. This speaks in favor oflimited citation substitution or - alternatively - a homogenous citation substitution toall three separate control groups.
The homogenous estimate masks the heterogeneity of the effect over time. In Figure27 we show the estimate of Column (3) with different USPC but same IPC and ofColumn (6) as time varying coefficients. Citation substitution seems to be concentratedin 1955/1956 and becomes less and less over time. So genuine increases in follow-oncitations seem to be concentrated in 1958/1959, two to three years after the consentdecree.
73
Figure 27: Effect of compulsory licensing on subsequent citations
(a) Counterfactual: Different USPC, same IPC−
10
12
34
Ex
cess
cit
atio
ns
49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70
Filing year of citing patent
(b) Counterfactual: Different USPC, same IPC
−1
01
23
4E
xce
ss c
itat
ion
s
45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70
Filing year of citing patent
D.1 Effects of compulsory licensing inside and outside of telecom-munication
In Figure 28, we analyze the heterogeneity of our difference-in-difference estimates bythe IPC class of the citing patent. It shows that after the consent decree, almost alladditional citations resulted from patents outside of the technology subcategory “Com-munication” (IPC H04). Again, a large part of the effect is driven by the technologyfields “Electrical Devices” and “Metal Working”.
74
Figure 28: Effect of compulsory licensing inside and outside of telecommunication byIPC classification.
Communications
Electrical Devices
Metal Working
Misc−Mechanical
Measuring & Testing
Misc−Chemical
Misc−Electrical
Computer Hardware & Software
−.2
0
.2
.4
.6
Ex
cess
Cit
atio
ns
500 1000 1500
# of Bell patents
Notes: This Figure shows results from a difference-in-differences estimation with the years1949 to 1953 as pre-treatment period and 1954 to 1960 as treatment period. As dependentvariable, we use all citations by other companies than the filing companies classified by thepatent’s IPC classification. A full dot signifies that a coefficient is significant on the 10%level.
75
E Post-decree royalty rates
Figure 29: Schedule of post-decree royalty rates (page 1/3)
76
Figure 30: Schedule of post-decree royalty rates (page 2/3)
77
Figure 31: Schedule of post-decree royalty rates (page 3/3)
78