Attributing Value to Patents and Trademarks in Complex Production Chains

Abstract

This article analyzes the value of a product’s surplus attributable to intellectual property (IP, such as patents or trademarks) relative to the product’s overall value. In a complex production process, learning by doing allows a leading firm to gain some surplus without IP, and as the number of steps approaches infinity, the surplus attributable to IP approaches zero. The value of the same IP held for licensing purposes, rather than to protect a production monopoly, shows no such convergence to zero. The model is used to explain the empirically observed differences between the use patterns of IP in industries based on discrete products, where patents are typically used to maintain monopolies, versus industries based on complex products, where patents are primarily licensing tools. The result is also applied to the questions of evaluating arm’s length transfers, which are often used to move revenue to tax-discounted IP boxes, and for discussion of non-practicing entities.