reverse licensing - c r e s s e · pdf fileby huawei) before doing the reverse licensing. chiu...

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.


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%.


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.

...


Introduction

Market Structure


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.


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.


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?


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.


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.


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.


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.


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.


Reverse Licensing

Game Structure


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.


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.


Different Licensing Schemes

Different Licensing Schemes

Independent Licensing

Patent Pool


Different Licensing Schemes Results

Results

Theorem 1

Reverse licensing yields highest consumer surplus and aggregate

producer surplus.

Reverse licensing could internalize externality.



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.



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.



ResultsComplements Problem (Cont.)

Q

α2(n−1)

n1 2

Qr

QiQp

Figure: Consumer surplus varies with compatibility


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.


Conclusion

Thank you!


reverse licensing - c r e s s e · pdf fileby huawei) before doing the reverse licensing. chiu...

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