Pro-competitive Action via Patent Sharing May Encourage Innovation

Companies that make a previously patented innovation accessible to
competitors by free licensing may ultimately increase their overall likelihood
of improving on the breakthrough, while also raising profits for the original
innovator and market welfare, according to a study by Gilad Sorek, PhD,
assistant visiting professor of economics at the University at Buffalo.

Free licensing is giving up patent protection, and Sorek considers his
theoretical analysis to be an evolutionary step in the study of patents and
their effect on innovation.

“The study provides a new explanation/rationale for free licensing
as an invitation to improve over patented technology,” he told O&P
Business News.
“There are situations where incumbents may gain from
inviting potential competitors into the R&D race.”

The study, to be published in an upcoming issue of Economics
, provides a novel explanation of the benefits of free licensing,
which he believes outweigh the risks of surrendering a share of the market.

“This research arose from the notion that a too-tight patent
protection actually may hinder technological progress, reflected in sovereign
acts taken by firms who give it up,” he said.

Invitation to compete

Free licensing works when the original innovator is able to stimulate
demand for its product, according to Sorek. While the company may lose a share
of the market, its product ultimately becomes more valuable as a result of the
extended innovation effort.

In their study, Sorek and colleagues explain the benefits and how a
leader in the field can gain from inviting another competitor to improve on an
existing patented technology via research and development. Free licensing
attracts rivals, which in turn, prompts an increased demand for current and
improved technologies. Ultimately, the likelihood that these improvement
efforts prove successful increases.

“There is a lot of research going on analyzing the motivations and
implications for patents licensing,” he said. “My study builds on
sovereign licensing that makes everyone better off, hence there is no need for
regulation or redesign of patent protection. It provides two examples in which
increase in aggregate odds for future improvements increase actual and future
value of the patent.”

Complementary technologies

Sorek and colleagues’ research cites previous studies that provided
examples of hardware and software companies such as IBM and Adobe taking
similar steps of free licensing.

“In the scenarios I studied, further innovation happens [through
free licensing] because a firm needs more research and development efforts to
be taken by other innovators to stimulate the development of complementary
technologies, or in order to encourage consumers stepping into a new
market,” Sorek said.

According to Sorek, if a hardware manufacturer sees many firms working
to improve software that runs on its equipment, the probability of that
software improving is greater than just one firm working toward that goal.
Further, there is a greater probability of success; the hardware firm will be
more likely to invest in improving upon its own technology, which in turn makes
software improvement more profitable.

“It doesn’t make any difference to the hardware firm which
software developer makes an improvement,” he stated in a press release.
“The hardware firm is concerned only that the improvement happens.”

While patents are routinely licensed by developers in exchange for
royalties, free licensing is strictly an invitation to compete. Innovators do
not collaborate — they continue efforts to independently improve upon a

“Independent research lines are crucial,” said Sorek. “If
two firms collaborate, pursuing the same experiment, those firms either succeed
or fail together. There is not much to be gained. But by working independently,
we have independent probabilities for success.”

“Innovation doesn’t just make innovators better off; it makes
current consumers better off and it provides the nexus to the next
technological breakthrough,” he said. – by Tara Grassia

For more information:

Sorek G. Free licensing to boost aggregate odds for success.
Economics Letters. 2012; in press.

Disclosure: Sorek has no relevant financial disclosures.

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