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Unfair Pricing and Standard Essential Patents

Technical standards that are agreed upon within a Standard Development Organization (SDO) often cover several ‘essential’ patents for implementing a standard (i.e., Standard Essential Patents, SEPs). In order to allow for the standard implementation,...

In the context of standards development, the current mechanism of negotiation of FRAND royalties frequently brings undesirable litigation. This is mainly due to the fact that a relevant part of the information concerning the standard, required to stipulate complete license contracts, is revealed only after the standard itself has spread in the market. In this respect, we propose a litigation-reducing algorithm to determine the FRAND level of the licensing royalty. Unlike the current negotiation mechanism, this algorithm can be defined ex-ante, so to increase contract completeness, because it includes a Bayesian-updating rule, able to address the presence of ex-ante uncertainty. We derive the algorithm from a generic oligopolistic-competition model, so to deliver characteristics of applicability to both price and quantity competition. Simulations in a linear-Cournot framework suggest the algorithm calculates FRAND royalties and may be usefully applied to real-life cases.

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