Compulsory patent licensing can be an effective remedy to enable entry in industries characterised by dynamic innovation. Yet, its success depends on the circumstances of the specific case.
In a new article published in the Journal of Industrial Economics, CRA’s Robin Mamrak shows that opening up an incumbent’s patent portfolio can promote follow-on innovation where patents are the main barrier to entry and entrants are well placed to exploit the newly available technology.
The article revisits the 1975 FTC consent decree that settled a year-long antitrust case against Xerox, the then-monopolist in the copier market, and required the licensing of its entire portfolio of more than 2,000 patents. The empirical analysis shows that follow-on innovation in copier technologies rose significantly after the intervention, with newly filed patents building on Xerox’s previously blocked technology. This contrasts with earlier evidence on the Bell consent decree, where compulsory licensing produced no comparable effect within the affected industry.
The comparison highlights the importance of the source of the incumbent’s market power: in the Xerox case, patents were the main barrier to entry. In the Bell case, other barriers to entry remained, thereby limiting the effectiveness of compulsory licensing in promoting follow-on innovation.
Beyond the source of market power, the competitive positioning of entrants also matters. Notably, most of the additional patenting after the FTC’s intervention against Xerox came from Japanese entrants, while there was no significant change in patenting among US firms. This is consistent with the different business model pursued by Japanese entrants: rather than competing head-on with Xerox in the high-volume segment, they used the newly available technology to develop smaller and cheaper desktop copiers for a lower-volume segment that Xerox barely served.
