Abuse of Dominance and Licensing of Intellectual Property

Abstract

This paper examines the impact of the licensing policies of one or moreupstream owners of \textit{essential} intellectual property (\textit{IP}hereafter) on the downstream firms that require access to that IP, as wellas on consumers and social welfare. The paper considers a model in whichthere is product differentiation downstream. License fees and fixed entrycosts determine the number of downstream competitors and thus variety.We first consider the case where there is a single upstream owner ofessential IP. Increasing the number of licenses enhances product variety,which creates added value, but it also intensifies downstream competition,which dissipates profits. We derive conditions under which the upstream IPmonopoly will then want to provide an excessive or insufficient number oflicenses, relative to the number that maximizes consumer surplus or socialwelfare.When there are multiple owners of essential IP, royalty stacking can reducethe number of the downstream licensees, but also the downstream equilibriumprices the consumers face. The paper derives conditions determining whetherthis reduction in downstream price and variety is beneficial to consumers orsociety.Finally, the paper explores the impact of alternative licensing policies.With fixed license fees or royalties expressed as a percentage of the price,an upstream IP owner cannot control the intensity of downstream competition.In contrast, volume-based license fees (i.e., per-unit access fees), dopermit an upstream owner to control downstream competition and to replicatethe outcome of complete integration. The paper also shows that verticalintegration can have little impact on downstream competition and licensingterms when IP owners charge fixed or volume-based access fees.