Repeated Interaction in Standard Setting

Abstract

As part of the standard-setting process, certain patents become essential. This may allow the owners of these standard-essential patents to hold up implementers of the standard, who can no longer turn to substitute technologies. However, many real-world standards evolve over time, with several generations of standards succeeding each other. Thus, standard setting is a repeated game in which participants can condition future behavior on whether or not hold-up has occurred in the past. In the presence of complementarity between the different patents included in the standard, technology contributors have an incentive to discipline each other and keep royalties low, which can be achieved by threatening to exclude contributors who have engaged in hold-up from future rounds of the process. We show that repeated standard setting can sustain FRAND royalties provided the probability that another round of standard setting will occur is sufficiently high. We also examine how the decision-making rules of standard-setting organizations affect the sustainability of FRAND royalties.