Wednesday, December 12, 2018
Choi, Jay Pil (Michigan State University, Department of Economics) and Gerlach, Heiko (University of Queensland) identify Optimal Cross-Licensing Arrangements: Collusion versus Entry Deterrence.
ABSTRACT: This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.