Ideas-Driven Endogenous Growth and Standard-Essential Patents

Résumé

In this paper, we study how the regulator expands production possibilities of the economy by assigning a standard-essential status to patents. Firstly, we show that productivity-enhancing standards tend to adversely affect the endogenous economic growth. This is due to the pace of discovery of new technologies is generally smaller than the rate of discounting of monopoly profits in equilibrium. We also demonstrate that the zero-sum redistribution of market share due to standardization by itself plays no role on an aggregate level. Secondly, standards may strengthen incentives to innovate when there are additional complementarities between standards and patents. When discovered, new additional technologies dampen incentive to engage in final good production relative to patents production—and relatively more human capital moves to the innovative sector of the economy, which enhances endogenous economic growth. Our results have significant policy implications. Regulators impose FRAND pricing on standard-essential technologies to compensate for the larger market-share the innovators get. As we show, the innovators’ risk of losing the standard-setting game ex-ante attenuates the anticipation of a higher market share. Thus FRAND regulation of mark-ups on top of that can easily have growth-destroying consequences.