Optimal cross-licensing arrangements: Collusion versus entry deterrence

Jay Pil Choi, Heiko Gerlach

Research output: Contribution to journalArticle

Abstract

This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.

Original languageEnglish
Article number103315
JournalEuropean Economic Review
Volume120
DOIs
Publication statusPublished - 2019 Nov

    Fingerprint

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this