Farrell (2009) - Intellectual Property As A Bargaining Environment

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• This page is referenced in the Patent Thicket Literature Review
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Reference

• Farrell, Joseph (2009), "Intellectual Property as a Bargaining Environment", Innovation Policy and the Economy, Vol.9, No.1, pp.pp. 39-53

@article{farrell2009intellectual,
  title = {Intellectual Property as a Bargaining Environment},
  author = {Farrell, Joseph},
  journal = {Innovation Policy and the Economy},
  volume = {9},
  number = {1},
  pages = {pp. 39-53},
  abstract = {Executive Summary Intellectual property policy relies on bargaining in the shadow of exclusivity. But bargaining is generically less than fully efficient, and the bargaining that would be needed to reach efficient arrangements in the shadow of exclusivity may be especially difficult in certain ways. I explore these issues and illustrate with brief discussions of patent pools and standards organizations, among others.},
  year = {2009},
  publisher = {The University of Chicago Press},
  copyright = {Copyright (c) 2009 The National Bureau of Economic Research},
  discipline={Econ},
  research_type={Discussion},
  industry={General},
  tags={SSO, Patent Pools, Cross-licensing},
  filename={Farrell (2009) - Intellectual Property As A Bargaining Environment.pdf}
}

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Abstract

Executive Summary Intellectual property policy relies on bargaining in the shadow of exclusivity. But bargaining is generically less than fully efficient, and the bargaining that would be needed to reach efficient arrangements in the shadow of exclusivity may be especially difficult in certain ways. I explore these issues and illustrate with brief discussions of patent pools and standards organizations, among others.

Review

This review is focused on just the components of the paper relevant to patent thickets. Much other useful material is covered in the paper but is outside of the scope of this review. This includes material related to:

• Endogenous formation of patent pools
• Endogenous participation in standard setting organizations (SSOs)\
• A discussion of Intel's IP practices and the FTC's case against Intel
• Negotiating IP upwards (but the paper argues that this is generally unlikely)

Information Problems

While not strictly an information asymmetry problem, the paper makes the point that producers might not know with whom they must negotiate concerning patents (i.e., which patents actually bear on their product). The paper refers to this as a 'potential patent thicket'.

"One might call this a “potential-patent thicket,” as distinct from the “actual-patent thicket” that can create multiple-marginalization problems when many patents are known to be infringed by a product. If a technology user cannot even list the patent holders who can block its product, negotiation will be very difficult."

Hold-out

In multi-lateral bargaining that might require unanimity or partial accords might be possible.

When unanimity is required:

• Nothing will be done without full participation (perfectly complementary inputs)
• Each player compares payoffs with and without agreement
• Information problems might make agreement hard even when there is joint-surplus

"The difficulty then arises because of information problems: even if we know that joint surplus increases, it may be hard to find that way to make everyone better off. A symmetric draft agreement that divides the gains equally will command unanimous assent only if the gains per participant exceed the maximum among the N participants’ costs of participation. This order statistic is likely to be well above the average, and agreement may very well fail even though the total gains easily exceed N times the average cost of participation."

When partial accords are possible (i.e., with imperfectly complementary inputs) it is possible that:

• The incentive condition for a complete agreement is less than the incentive condition for a partial accord

"Then the incentive condition for it to be an equilibrium for everyone to join in is no longer that the proposed agreement is better for all than the status quo. Now, the condition is that the proposed agreement is better for each player than having the other N � 1 players implement an incomplete agreement. When a partial agreement benefits the nonparticipating (holdout) player, then this condition is harder to satisfy than the simple “benefits all relative to status quo” condition. As a result, a full agreement might be impossible if partial agreements would occur."

Cross-licensing

In response to a patent thicket problem, the paper claims that industry players sought to 'negotiate IP downwards' using broad cross-licenses and that this is falling apart for two reasons:

"For some time, major established players largely neutralized some aspects of the patent system among themselves by agreeing to broad cross-licenses: I’ll call this their Big Deal (see, e.g., Parchomovsky and Wagner 2005). They were thus able to design products (including innovating) with much less role for intellectual property than under the default rules. Many observers think the Big Deal has broken down—not completely, but substantially."

• Balance of interests
  • Each participant must value 'design freedom' more than its alternatives
  • This is undermined by a hold-up problem - Non-manufacturing patent holders (NPEs) may seek enforcement
• Open-ended set of participants
  • Negotiating with heterogeneous rivals is difficult
  • New participants may show up at any time - the information problem then makes it hard to know who to deal with