Ex-ante Agreements and FRAND Commitments in a Repeated Game of Standard-Setting Organizations
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I study licensing and technology choice in standard setting. I find that there may be inefficient adoption of technologies, even when firms commit to a maximum royalty or price cap for the use of their patents. When firms interact repeatedly to develop standards, a commitment to set fair, reasonable and non-discriminatory (FRAND) royalty fees may lead to more efficient technologies and higher surplus for all parties. This result can explain why standard-setting organizations favor FRAND commitments over more structured licensing commitments—such as price caps—and why there are been relatively few cases of hold-up in practice, even though such opportunistic behavior has been a primary cause of concern for innovation economists.
KeywordsStandard formation Standard-setting organizations Hold-up Price caps FRAND commitments Repeated games Relational contracts
Mathematics Subject ClassificationO31 O34 L15 L40
A previous version of the paper circulated under the name “Licensing rules and technology choice in Standard Setting Organizations.” I am grateful to Stefano Trento, Francisco Ruiz-Aliseda, and participants of seminars at the 2011 EARIE Conference (Stockholm, Sweden), the 2011 LACEA-LAMES Conference (Santiago, Chile), Universitat Autònoma de Barcelona, Universidad de Santiago de Chile, and Universidad Alberto Hurtado for useful comments and suggestions. I gratefully acknowledge financial support from Conicyt (Fondecyt No. 1150326) and the Institute for Research in Market Imperfections and Public Policy, MIPP, ICM IS130002, Ministerio de Economía, Fomento y Turismo.
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