Payments and Participation: The Incentives to Join Cooperative Standard Setting Efforts

This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap for patents incorporated into a standard. In particular, we evaluate the “Incremental Value” rule as a way to reward firms that contribute technology to a standard. This rule has been proposed as a means of avoiding patent hold-up of licensing firms by granting patent holders compensation equal to the value that their technology contributes to the standard on an ex-ante basis, as compared to the next best alternative. Our analysis shows that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in the SSO. Specifically, firms being rewarded according to this rule will inefficiently decide not to join the SSO, under the expectation that their technology becomes ex-post essential at which point they may negotiate larger payments from the SSO. JEL codes: L15, L24, O31, O34. keywords: Intellectual Property, Standard Setting Organizations, Licensing, Incremental value. ∗We thank Guillermo Caruana, Mario Mariniello, Carlos Ponce, Armin Schmutzler, and participants at the XI CEPR Conference on Applied Industrial Organization and the 2010 Cresse conference for use­ ful comments. Financial support from Qualcomm is gratefully acknowledged. The ideas and opinions in this paper, as well as any errors, are exclusively the authors. Comments should be sent to alayne­ [email protected], [email protected] and [email protected].