Intellectual property clearinghouses: The effects of reduced transaction costs in licensing

Abstract

We focus on downstream uses of intellectual property (IP) that combine multiple rights and examine the effects of introducing an IP clearinghouse. We identify the two sometimes conflicting functions of clearinghouses: transaction cost reductions and coordination. We show that reduced transaction costs cause licensors to raise royalties in some cases, which makes them worse off due to the ‘tragedy of the anticommons’. Downstream welfare effects may also be positive or negative and we characterize the effects on downstream manufacturers and final consumers. We also show that total welfare is most likely to increase following a transaction cost reduction when the number of intellectual property rights per downstream use is small, or if rights are relatively substitutable in downstream use, but it is also possible for welfare to decrease.