Economic Theory and Experiments - Heiko Garlach (University of Queensland)

Title: Patent Licensing in the Supply Chain

Abstract: Motivated by recent policy discussions, this paper analyzes a patent holder's licensee choice in a supply chain. We first derive a neutrality result that shows the irrelevance of the licensing stage in the benchmark case of perfect competition at both the upstream and downstream stage. When only one segment of the value chain is monopolistic, the patent holder prefers licensing at the monopolistic stage leading to an alignment between private and social incentives. With imperfect competition at both stages, excessive downstream licensing can arise. We also demonstrate that charging royalties at both stages ("double dipping") can be profitable for the patent holder and beneficial for consumers. We discuss the consequences of this result for the “First Sale Doctrine” of intellectual property.