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Reverse Licensing
Chiu Yu Ko Xuyao Zhang
National University of Singapore
CRESSE Conference 2016
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 1 / 22
Introduction
Background: Qualcomm (Upstream)
Qualcomm is the world largest smartphone chipmaker.
Market dominance:
In some markets, 100% market share.
In CDMA, WCDMA and LTE markets, more than 50% market share.
The technologies/chips are essential to downstream firms.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 2 / 22
Introduction
Background: Chinese Market (Downstream)
In China, two major patent holders (smartphone producers):
Huawei Technologies Co. Ltd (Huawei): 30000 patents with market
share 8.4%.
Zhongxing Telecommunication Equipment (ZTE): 52000 patents
with market share 3.1%.
Other smartphone producers: Xiaomi and OPPO have only 10
and 103 patents with market share 5.6% and 3.8%.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 3 / 22
Introduction
Background: Anti-Competitive
In November 2013, China’s National Development and Reform
Commission (NDRC) started an investigation on Qualcomm on
anticompetitive conduct.
Requiring Chinese licensees to cross-license their relevant patents
to Qualcomm and its costomers without compensation and without
offsetting royalties. (Reverse Licensing)
Bundling Stand Essential Patents (SEP) and non-SEPs without
justification.
Charging for expired patents.
...
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 4 / 22
Introduction
Remedies
On 2 March, 2015, NDRC published its decision:
No cross-license of Non SEPs against licensees’ will
No cross license without fair compensation.
Qualcomm has to pay for the patents (e.g. the technology holding
by Huawei) before doing the reverse licensing.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 6 / 22
Introduction
Besides Reverse Licensing
There are other ways to do licensing in this vertical structure:
Independent Licensing: Firms with technology do independent
licensing themselves.
Patent Pool: Firms with technology form a patent pool and do
licensing together.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 7 / 22
Introduction
Research Question
What’s the effect of the remedy? Improve social welfare?
In this kind of vertical structure, is this reverse licensing best for
consumers? producers? social welfare?
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 8 / 22
Introduction
Main Results
Consumer surplus and aggregate producer surplus will be
improved under two-part tariff compensation scheme.
Reverse licensing yields highest consumer surplus and firms’
aggregate profits.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 9 / 22
Reverse Licensing
Model
One upstream monopoly manufacturer.
n downstream firms engage in Cournot competition.
The monopoly charges d per unit for the intermediary input to
downstream firms.
Cost of the input= 0.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 10 / 22
Reverse Licensing
Model: Downstream
Firm 1 and 2 (Huawei and ZTE) possess technology (process
innovation) εi = ε.
Cost of production for firms 1 and 2: c − εi
Cost of production for other firms: c
Let α ∈ [1, 2] measures the compatibility of technologies:
the aggregate technology level by combining ε1 and ε2 is αε.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 11 / 22
Reverse Licensing
Assumptions
Linear demand: Q = a − p.
All firms are making positive production initially.
We allow firms to exit in reverse licensing, independent licensing
and patent pool cases.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 12 / 22
Reverse Licensing
Reverse Licensing: Before the Antitrust Investigation
1 Firms 1 and 2 must surrender their technologies to the
manufacturer.
2 manufacturer set both the price d for the input and royalty ri for the
technologies.
3 Downstream firms purchase the input and technologies, then
engage in Cournot competition.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 13 / 22
Reverse Licensing
Game Structure
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 14 / 22
Reverse Licensing
Equilibrium: Optimal Pricing
Proposition 1
The manufacturer charges the same r r across the downstream firms.
Consistent with reality, Qualcomm tends to do licensing without
fair compensation to the firms providing technology, i.e. Huawei
and ZTE.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 15 / 22
Reverse Licensing Compensation Schemes
Compensation Schemes
Two-part tariff: royalty discount (r d )+ fixed fee compensation (F d ).
Let Γ be the outside option of firms 1 and 2 for NOT surrendering
the technologies
Proposition 2
(1) rd > 0. (2) If Γ is sufficiently large, F d > 0. Otherwise, F d = 0. (3)
Consumer surplus and aggregate producer surplus will always be
improved.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 16 / 22
Different Licensing Schemes
Different Licensing Schemes
Independent Licensing
Patent Pool
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 17 / 22
Different Licensing Schemes Results
Results
Theorem 1
Reverse licensing yields highest consumer surplus and aggregate
producer surplus.
Reverse licensing could internalize externality.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 18 / 22
Different Licensing Schemes Results
ResultsComplements Problem
Complements Problem: When two (or more) perfectly complements
are used as input (patent) for downstream firms’ production, patent
pool could reduce the patent burdens.
Proposed by Cournot in 1838, studied by Shapiro (2001)
Theorem 1: Reverse licensing could solve the problem; better
than patent pool.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 19 / 22
Different Licensing Schemes Results
ResultsComplements Problem (Cont.)
Consider all firms stay (in this presentation): 0 < ε < 15α(a − c)
Proposition 3
When α < 2(n−1)n , Qi > Qp and Πi > Πp.
Patent pool fails: a little deviation from perfect complement.
Regardless of compatibility α: reverse licensing is the best.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 20 / 22
Different Licensing Schemes Results
ResultsComplements Problem (Cont.)
Q
α2(n−1)
n1 2
Qr
QiQp
Figure: Consumer surplus varies with compatibility
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 21 / 22
Conclusion
Conclusion
Compared with other licensing schemes, reverse Licensing
improves consumer surplus, aggregate profit, and hence social
welfare.
Two-part tariff compensation scheme will further improves these
measures.
Chiu Yu Ko, Xuyao Zhang (NUS) Reverse Licensing CRESSE 2016 22 / 22