nep-ipr New Economics Papers
on Intellectual Property Rights
Issue of 2017‒01‒22
seven papers chosen by
Giovanni Ramello
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. Patenting vs. Secrecy for Startups and the Trade of Patents as Negotiating Assets By Andreas Panagopoulos; In-Uck Park
  2. Using the Patent Term Changes in Assessing the Evolution of Patent Valuation from Filing to Maturity By Andreas Panagopoulos; Kyriakos Drivas
  3. Cross-Border Co-opetition through Market Co-creation By Andreas Panagopoulos; Christos Pitelis; Panos Desyllas
  4. Global collaborative patents By Pekkala Kerr, Sari; Kerr, William R.
  5. The Benefit of Collective Reputation By Zvika Neemam; Aniko Ory; Jungju Yu
  6. Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases By Chryssoula Pentheroudakis; Justus A. Baron
  7. Intellectual Property-Related Preferential Trade Agreements and the Composition of Trade By Keith E. Maskus; William Ridley

  1. By: Andreas Panagopoulos (Department of Economics, University of Crete, Greece); In-Uck Park
    Abstract: The term “patent paradox” refers to the increased use of patents, despite being perceived as having limited stand-alone value as incentives to innovate (Hall et al., 2012). This phenomenon can be attributed to the array of roles patents may play. One role particularly relevant in this context is their use as bargaining chips by firms who employ many patents bundled into patent portfolios to gain a better hand in licensing negotiations, especially in industries where technology is cumulative (Hall and Ziedonis, 2001). As argued by Lanjouw and Schankerman (2004), patent portfolios endow such uses because patents confer “enforcement spillovers” that allow firms to exploit economies of scale, making it less costly to protect a patent when it is part of a bundle, in which case small firms like startups, that hold few patents, are at a disadvantage. In fact, for startup firms patents may even be a “liability” as they can invite infringement allegations from dominant firms with a portfolio of patents. Fear of evoking such highly costly legal disputes is known to force startups to redirect their research (Lerner, 1995) and may well have contributed to the tendency of startups to prefer trade secrecy over patenting as found in some studies, e.g., Graham et al. (2009). In a world of dominant firms and patent portfolios, is there a role for patents as incentives to innovate for tech-startups, or should these innovative firms, which play an outsized role in US net job creation (Hathaway, 2013), prefer secrecy instead? This is an important question because patents, unlike trade secrets, promote welfare enhancing diffusion and knowledge spillovers. The use of patents as leverage in licensing negotiations stems from ownership contentions that arise due to the inherent difficulty (especially in cumulative innovation) of confining bordering technologies. Due to such contentions, when licensing or trading a patent whose ownership is potentially disputed by the prospective licensee, a startup may not be able to reap the full value of its patented technology because the negotiations take place in the shadow of infringement litigation (Shapiro, 2003). Nevertheless, we argue that trade secrecy may not be the best resort. Instead, we show that overt ownership of technology through patenting, together with appropriate channels for ownership trading, can work better to incentivize startups’ innovation activities. Specifically, we present an equilibrium analysis of a dynamic model that clarifies when and how patents may outperform trade secrets in promoting startup innovations. In the process, we also provide some policy implications. Our main thesis is that when trading a patent its owner is potentially selling more than a monopoly right. Specifically, insofar as patents’ enforcing capacity spills over as mentioned above, when a patent is added to a patent portfolio it enhances the portfolio’s muscle in enforcing the rights of any given patent in the bundle. Such additional leverage correspondingly increases the portfolio’s ability to favourably barter a future technology transfer agreement against potential infringers. Thus, a transfer of patent rights does not only convey monopoly profits on the technology embodied in the patents’ claims (as trade secrets do), but also extra surplus from the patents’ capacity to affect future technology transfer negotiations. Therefore, when an innovator transfers a patent, even though its transfer price may not be able to capture the full monopoly profits (because of the risk of infringement), it may merit a markup reflecting the prospect of such extra future surplus. When a sequence of startups are expected to patent and transfer their technology to an incumbent, gradually increasing its future bargaining power, the dynamic feedback effects on this markup can be large enough so that the patent’s transfer price exceeds the value of a trade secret. In short, since patent portfolios do not only engender the threat
    Keywords: Patents, trade secrets, startups, takeovers
    JEL: L22 L10 D43
    Date: 2016–09–24
  2. By: Andreas Panagopoulos (Department of Economics, University of Crete, Greece); Kyriakos Drivas
    Abstract: Patents, or literae patentae (open grants) as originally known, are public documents that disclose the particulars of an innovation. In terms of a territorial metaphor, one can think of patents as property deeds that demarcate a technological territory. Such demarcation allows for frictionless tech-transfer because licensor and licensee have at hand a chart of the technology. When too many patents accumulate, as is the present case of affairs, the technology’s borders can become foggy because numerous neighbouring patentees may own overlapping technologies. So what was once a technology with a clearly attached value to it becomes an uncertain asset, in which case tech-transfer is plagued by higher transaction costs as only courts can demarcate the innovation’s borders. Effectively what was assumed as an open grant can become a quasi literac clausae (close grant) until such demarcation takes place. How to avoid such conversion has stirred up a policy debate on how to evade patent overpopulation; see Correa (2014). Since policy makers must have an appreciation of the usefulness of patents as R&D incentives before contemplating policy exercises, and considering that the only evidence comes from surveys, we revisit the issue. Survey data are limited to the extent that agents are revealing their true priors and only their actions can act as revelation mechanisms. In this paper we use a quasi-natural experiment that reveals their priors at the point of filing a patent. The quasi-natural experiment we use involves the introduction of the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement in the US. Before TRIPS the USPTO granted patents for 17 years from the grant date of the patent. By implementing TRIPS the USPTO changed its practice, granting patents with a patent length equal to 20 years since the original patent filing date. In order to facilitate this change, the USPTO (unexpectedly) allowed applicants who filed prior to June 8th 1995 a patent length that was equal to the maximum of the two regimes. Since on average a patent spends at least three years in prosecution at the USPTO, applicants that filed before the deadline were given a possible small extension of patent length. If a patent embodies an industrial application (as patents are obliged to by law – in the US the patentability requirement is for utility), and its per-period value can be mundanely calculated, then any opportunity of extending one’s monopoly tenure must be seized. If the patent is filed for reasons unrelated to the certitude of the embodied technology, its uses must be harder to blueprint prior to being issued, and its value uncertain. Assuming otherwise can only imply that the golden stamp of the patent document can attach an a priori certified value to a set of irrelevant technical claims; a free lunch no doubt.1 Thus, in the latter case, the present value of a possible tenure extension (of a few weeks/months) must be harder to pinpoint in advance. An innovator who is constrained in terms of her patent filing volume (and must prioritise her patenting) should be inclined to file the patents considered as more valuable first. Having to choose between a patent whose value is hard to pinpoint in advance and one of known technical quality, she should rationally opt for the latter. Ergo, the introduction of TRIPS, by inadvertently offering a possible extension of patent term created a metric of patent self-valuation. The metric is simple: patents encompassing valuable technologies must be given priority and filed before the deadline. In view of this metric, we acquire information for all utility patents that were filed around June 8th 1995 for the following technology fields: Chemicals, Computers & Communications, Drugs & Medical, Electrical & Electronics, and Mechanicals. Our data is both at the industry level and the firm level, and it includes continuing applications that were filed prior to the deadline; these are applications that were originally filed prior to the unexpected regime change. The data indicates that Drugs & Medical patents, and Chemical patents, were significantly more likely to be filed before the deadline than patents in any other field. This result, which does not change at the firm level and when accounting for continuations, accords with survey evidence that finds patents as being more valuable (as incentives to innovate) to the pharmaceutical and chemical industry; see Cohen, Nelson and Walsh (2000).
    Keywords: patent portfolios, patent renewals, R&D incentives, technology transfer policy, TRIPS
    JEL: L10 M10 O34
    Date: 2016–09–24
  3. By: Andreas Panagopoulos (Department of Economics, University of Crete, Greece); Christos Pitelis; Panos Desyllas
    Abstract: In its August 8th 2015 leader, the Economist magazine questions the evidence for patent protection and proposes innovative alternative ways to foster innovation, including new forms of public sector regulation. Our aim is to suggest a market-based alternative and complement to regulation that leverages the joint benefits to companies that choose to cooperate and compete (co-opete), as opposed to the two extremes of direct competition, or collusion. We draw on the idea of market co-creation by companies in ‘advanced’ and emerging countries, using the pharmaceutical industry as our focus of examination. Over the last two decades, emerging country pharmaceutical companies operate in an increasingly challenging competitive environment (Ghauri and Santangelo, 2012; Angeli, 2013). This new environment is, in part, the result of a series of international trade agreements that have strengthened the Intellectual Property (IP) regime worldwide. These agreements include the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, the subsequent Anti- Counterfeiting Trade Agreement (ACTA), and the more recent Trans-Pacific Partnership (TPP) agreement. They are based on the view that global IP protection will foster trade opportunities across the world and also facilitate technology transfer from advanced to emerging countries (Blakeney, 2013; Yang, 2012). This new IP regime is affecting competitive dynamics, particularly in the pharmaceutical industry where patents confer robust protection and are essential for the commercialization of innovations (James et al., 2013). In the past, emerging country pharmaceutical firms (EPFs) relied extensively on reverse engineering of patented compounds to produce “generic” versions of branded drugs at a fraction of the costs faced by the original innovators (McKinsey Report, 2013). However, the result of TRIPS (and the subsequent agreements) has been to place restrictions on the space for the production of generic drugs (Shaffer and Brenner, 2009). Thus, EPFs had to fundamentally rethink their “closed” business models, which were oriented towards reverse engineering and low-cost manufacturing (Angeli, 2013). Pharmaceutical firms in emerging countries, such as India, have adopted different strategies to adjust to the new environment. Some firms try to leverage their location advantages at home, such as relationships with hospital and doctors, but also frugal innovation-type strategies (Anand and Kale, 2006; Greenhalgh, 2013). Others attempt to upgrade their production and marketing capabilities to offer ‘branded generics’. And others contest the IP rights of advanced country multinational companies. In 2005, for instance, several Indian generics producers successfully challenged Novartis’ attempt to obtain patent protection for an updated version of its drug Gleevec (for chronic myeloid leukemia) in India (Shadlen and Guennif, 2011). Direct competition, however, between EPFs and “advanced” country multinational enterprises (AMNEs) may not be the most desirable competitive outcome for either groups of firms. Instead, some form of cooperation can prove preferable to both parties when EPFs can leverage complementary assets and capabilities to extend and co-create market space. For instance, in 2009, Dr. Reddy’s Labs established a partnership with GlaxoSmithKline plc to develop and market drugs in fast growing therapeutic segments (e.g. cardiovascular, diabetes, oncology, gastroenterology) across several emerging markets. Products were manufactured by Dr. Reddy’s and were licensed and supplied to GlaxoSmithKline in various emerging markets, while revenues shared between the two partners. In other products and markets the two firms continued to compete.
    Keywords: cross-border co-opetition, market co-creation, complementary assets, intellectual property rights, MNEs, pharmaceuticals
    JEL: K11
    Date: 2016–09–24
  4. By: Pekkala Kerr, Sari; Kerr, William R.
    Abstract: We study the prevalence and traits of global collaborative patents for U.S. public companies, where the inventor team is located both within and outside of the United States. Collaborative patents are frequently observed when a corporation is entering into a new foreign region for innovative work, especially in settings where intellectual property protection is weak. We also connect collaborative patents to the ethnic composition of the firm s U.S. inventors and cross-border mobility of inventors within the firm. The inventor team composition has important consequences for how the new knowledge is exploited within and outside of the firm.
    JEL: O32 F02 F22 F23 F60 J15 O19 O3 O33 O34
    Date: 2017–01–13
  5. By: Zvika Neemam (Tel Aviv University); Aniko Ory (Cowles Foundation, Yale University); Jungju Yu (Yale School of Management)
    Abstract: We study a model of collective reputation and use it to analyze the benefit of collective brands. Consumers form beliefs about the quality of an experience good that is produced by one firm that is part of a collective brand. Consumers’ limited ability to distinguish among firms in the collective and to monitor firms’ investment decisions creates incentives to free-ride on other firms’ investment efforts. Nevertheless, we show that collective brands induce stronger incentives to invest in quality than individual brands under two types of circumstances: if the main concern is with quality control and the baseline reputation of the collective is low, or if the main concern is with the acquisition of specialized knowledge and the baseline reputation of the collective is high. We also contrast the socially optimal information structure with the profit maximizing choice of branding if branding is endogenous. Our results can be applied to country-of-origin, agricultural appellation, and other collective brands.
    Keywords: Branding, Collective reputation, Commitment, Country of origin
    JEL: C70 D21 D40 D70 L10 L50
    Date: 2016–12
  6. By: Chryssoula Pentheroudakis; Justus A. Baron (Northwestern University; Pritzker School of Law; Searle Center on Law, Regulation and Economic Growth)
    Abstract: The prospect of licensing patents that are essential to standards on an industry-wide scale is a major incentive for companies to invest in standardization activities. Most standard development organizations (SDOs) have defined intellectual property rights (IPR) policies whereby SDO members must commit to licensing their standard-essential patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. This study aims to provide a consistent framework for both the interpretation of FRAND commitments and the definition of FRAND royalties. Our methodology is built on the analysis of landmark and significant decisions taken by courts and competition authorities in Europe and worldwide. The purpose of the comparative analysis is to provide a comprehensive overview of how FRAND licensing terms have been defined in the evolving case law, while testing the economic soundness of the concepts and methodologies applied by courts and antitrust authorities.
    Keywords: patents, innovation, standardisation, standard essential patents, FRAND licensing
    Date: 2016–12
  7. By: Keith E. Maskus; William Ridley
    Abstract: We study the role of preferential trade agreements (PTAs) with complex chapters covering intellectual property rights (IPRs) in determining the magnitude and composition of countries’ trade. Changes in the global IPRs environment have increasingly been negotiated within the terms of PTAs. Despite the proliferation of PTAs with strong IPRs standards, little attention has been paid to their effects on the trade of member countries. Using a carefully designed empirical framework, we find that PTAs, where one partner is either the United States, the European Union, or the European Free Trade Assocation, with rigorous IPRs chapters have significant impacts on members’ aggregate trade. The results are further broken down by income groups and the composition of sectoral trade. The findings accord with predicted relationships from previous research on IPRs and trade and suggest that regulatory aspects of trade agreements have important cross-border impacts. This possibility has been little studied to date.
    Keywords: China, intellectual property, IPRs, innovation policy, trade agreements
    Date: 2016–09

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