Cross-Licensing and Competition

Abstract

This paper examines the cross-licensing agreements between N>2 patent holders who compete in a downstream market. It is shown that, under a laissez-faire policy, bilaterally efficient agreements allow firms to achieve the industry profit-maximizing outcome. A legal upper bound on the per-unit royalty charged by a patent holder can however induce firms to sign royalty-free cross-licensing contracts, which yields the most competitive outcome. The analysis is then extended to a general class of two-stage games in which firms bilaterally agree in the first stage to make each other payments that depend on their second-stage non-cooperative actions.