Senior Consultant, Damien Neven, co-authored an article for the Journal of Competition Law & Economics alongside academic affiliate, Gerard Llobet, exploring the effects of investment and patent licensing in the value chain.
At which stage in the production chain should patent licensing take place? In this paper we show that under realistic circumstances a patent holder would be better off by licensing downstream. This occurs when the licensing revenue can depend on the downstream value of the product either directly or through the use of ad-valorem royalties. Downstream licensing is also preferred by the patent holder when, instead, we assume that the downstream licensee is less informed about the validity of the patent. In most cases, downstream licensing increases allocative efficiency. However, it might reduce the manufacturer’s incentives to invest and, thereby, decrease welfare. We characterize the circumstances under which a conflict arises between the stage at which patent holders prefer to license their technology and the stage at which it is optimal from a social standpoint that licensing takes place.
This article was originally published by the Journal of Competition Law & Economics here. The views expressed in this paper are the sole responsibility of the author and cannot be attributed to Compass Lexecon or any other parties.