A long-standing principle of patent systems is that the patent holder can decide whom to license based on the field-of-use and what to ask, creating a mechanism to price differentiate, that is, to charge different prices for the same patented technology, depending on the value of its use.
Such a mechanism allows the patented technology to be distributed (allocated) through markets to a maximum number of competing and non-competing users (firms), at prices based on the (risky and uncertain) value of their future use (in new innovations), adding to the revenues (and likely profits) of inventors.
We examine this principle by means of a literature review and discuss, both in a short-run static and a long-run dynamic setting, the economic efficiency of such price differentiation (price ‘discrimination’ in the economic literature) by field-of-use with respect to licensing contracts concerning patents essential to a standard,2 that is, Standard Essential Patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions.
Article ref.: Ullberg, 2019, Economic efficiency and field-of-use pricing of SEP licences under FRAND terms, Queen Mary Journal of Intellectual Property, Vol. 9 No. 4, pp. 392–413
Also available at: 4iP Council’s web page.
This article is concerned with the producer market in patented technology, and whether price differentiation based on field-of-use – a common strategy adopted by businesses with high fixed costs – is economically efficient. The focus is on the licensing of Standard Essential Patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions, including also the Internet of Things (IoT) applications, and the economic growth in the digital economy, especially for small and medium sized enterprises (SMEs). The central argument proposed is that the absolute difference in the value between usages of essential standardized technologies determines whether a single price for all usages or specific field-of-use prices are economically efficient. A small difference in value should result in a single price and a large difference in different prices. Pricing policy is critical to create a world-wide sustained technology development including contributions from, and applications for, emerging markets and developed markets, thereby growing the digital economy.
In this literature review, three evaluation angles of the literature are used: a market analysis under neo-classical assumptions of price-taking agents and marginal (incremental) value; an expanded market analysis where the willingness to pay (WTP) replaces marginal cost as criteria for what price should be paid for licences; and an analysis of market designs with similar characteristics as the SEP market in terms of risk, using experimental economics (behavioural) and auction theory. All analyses angles investigate the principle of field-of-use licensing, established already in the first known patent law in 1474.
Chile, El Salvador, Peru, Kenya, Azerbaijan, South Africa and Uganda are participating in a forward-looking study to inform a new economic development policy based on leveraging the human capital formation of developing nations through markets in patents (licensing). A first pilot-study consisting of surveys of inventors on cross-border licensing practices and prices and video-workshops with inventors and policy makers from these countries were reported on Nov 26. The event was organised by WTO with introduction by Deputy Director General Mr. Yi and moderated by Mr. Koopman, chief economist at WTO.
The next steps to inform a national and international policy discussion were presented, including an already started statistics framework study – a key to measure the impact of such a policy.
A key initiative is to create a LDC package with the least developed countries (47 in 2018), providing everything needed to being licensing of their patented technology to the world, leveraging their human capital formation. Some of these inventor-companies may have the potential to become “economic locomotives” for these countries, creating opportunities for their nations.
The Foreign Office of the Kingdom of Sweden funded the pilot and the statistics study.
On October 26, 10-12, a presentation of the Trade in Ideas Program took place at the WTO for the Working Group on Trade and Transfer of Technology (WGTTT). El Salvador, a participant in the Trade in Ideas Pilot-study, had asked the EC, through Sweden, the funder of the pilot-study, to give an overview of the principle and program in eluding some early results.
If any additional information about the program is desired, please email: email@example.com
Enclosed is the powerpoint from the meeting. See: Powerpoint for WGTTT, 2018-06-27
ABC RN in Australia interviewed on “A Global Patent Market” as a consequence of the Op-Ed together with Edmund Phelps, Columbia.
Should there be a global patent market?
A new report argues that now ‘more than ever the world needs a framework of trade rules to facilitate the exchange of ideas across borders.
Eskil Ullberg is the co-author of that report and he believes that a cross -border technology exchange based on patent protection and enforcement mechanisms could release the creativity of both developed and developing countries.
So what would have to happen for this to work and does the WTO agree?
Hear interview can be listened to here.
Re-published op-ed with the World Economic Forum.