Component vs. product competition and the licensing level of Standard Essential Patents

We build a stylized model of the value chain of an industry in which component suppliers sell their products to manufacturers and the licensor chooses the level of the value chain at which it licenses. We then study whether the licensing level chosen by the licensor affects profits of the firms in different competitive environment of both the component and the product markets. We show that, contrary to common expectations, in our model the level of the value chain at which the licensee operates does not affect the profits of the firms, the level of the royalty and the price of the final product, irrespective of the degree of competition in the component and product markets. Our results shed some light on the debate, brought to public attention by Daimler v. Nokia and Continental v. Avanci, on the level of the value chain at which licensors of standard essential patents should license. Our findings may also be of guidance for an evaluation of the withdrawn proposal of a Standard Essential Patents Regulation and the recently revised Technology Transfer Block Exemption Regulation in the EU.