1. © Suzanne Scotchmer 2007 from Innovation and Incentives Licensing Some Terms: Exclusive Exclusive licensing versus exclusive dealing Royalties versus Fixed Fees Pro-competitive, anticompetitive Merger Complements versus Substitutes

2. © Suzanne Scotchmer 2007 from Innovation and Incentives The Pro-Competitive Uses of Licensing (efficiency) 1. Production Efficiencies & Information Sharing 2. Follow-on Innovation 3. Develop complementary products Basic Antitrust Concern: preserve competition. How does this fit with IP, which grants market power? Sherman Act: Section 1: prohibits acts in restraint of trade (requires 2 parties or more) Section 2: prohibits attempts to monopolize (applies to single actors) Basic law: “rule of reason” : efficiency vs monopoly 1995 Antitrust Guidelines

3. © Suzanne Scotchmer 2007 from Innovation and Incentives Production Efficiencies marginal revenue c(q)c(q) (q)(q) qd(p)qd(p) p*p* q*q* q qd(p)qd(p) p = c p*p* q New products: How can the proprietor achieve the monopoly price? Cost reducing Innovations: What will be the consequence of licensing? Are there any dangers here?

4. © Suzanne Scotchmer 2007 from Innovation and Incentives Developing Follow-On Products: We already discussed this Developing Complementary Products We will discuss this later in Chapter 10

5. © Suzanne Scotchmer 2007 from Innovation and Incentives Inefficiencies: Reducing the Rate of Progress (Mergers and Anticompetitive Licensing) Suppose the patent value supports the efficient amount of entry into a race. What will happen if the firms make an agreement? How does this depend on the possibility of unlicensed entry? General Point: Free entry mitigates harm from agreements. Why?  (n)S number of firms n Free entry outcome is optimal when winner receives value  (v) n * =2 cn  (n)  (v) n=1

6. © Suzanne Scotchmer 2007 from Innovation and Incentives Chiron patented the genetic code for Hepatitus C virus. Eli Lilly and Merck, as well as Chiron, would like to use the gene sequence to develop a vaccine or therapy. Does Chiron have a legal right to withhold license? (yes) If Chiron could develop the vaccine, might it license anyway? Why? Compare the outcomes, in terms of efficiency, if –Chiron gave an exclusive license –Chiron gave a nonexclusive license –Merck & EliLilly could develop mutually noninfringing vaccines. Evaluate: With the Chiron patent, the therapy will not be achieved as fast or as certainly as with no patent (see above diagram) Would the vaccine be more efficiently developed if the genetic code was in the public domain? The Cumulative Context: An example

7. © Suzanne Scotchmer 2007 from Innovation and Incentives Patent Pools: Substitutes: Infringing: Airplanes --Glenn Curtis’ patents infringed the Wright brothers, who would not license. Noninfringing -- what is the danger? Blocking Patents: the VISX/Summit Pool Complements Prices may be lower with patent pools, as discussed in Cumulative Innovation

8. © Suzanne Scotchmer 2007 from Innovation and Incentives papa phph p1p1 w(n) n * /2 n * -1 n n F } cn Collective Rights Management Organizations

9. © Suzanne Scotchmer 2007 from Innovation and Incentives Collective Rights Management In the above diagram, compare: Individual negotiation Free entry Shared profit at the optimal number of creators The ability of the cartel to exclude artists Are ASCAP and BMI threats to competition? Are they collusion? How should they be governed?

10. © Suzanne Scotchmer 2007 from Innovation and Incentives Licensing versus Sale Patented objects and copyrighted books are usually sold, not licensed. The right to use the “template” is usually licensed. This is changing in copyright industries, where you now license the right to use software rather than buying the CD with no restrictions. Main consequence: Licensing allows restrictions. What should we make of this?