Federico Vaccari

Abstract:

Two innovators develop technologies that may be substitutes or complementary components of a superior standard. A standard-setting organization (SSO) selects and implements the standard and negotiates licensing terms with innovators either ex ante (before selection of the standard) or ex post (after selection). We show that the negotiation timing shapes R&D incentives, innovation quality, and welfare. Ex-ante bargaining curbs hold-up and sharpens competition; ex-post bargaining can strengthen R&D when the successful innovator appropriates a sufficiently large share of the combined value. The SSO’s preferred protocol depends on its bargaining power and on the R&D differential across regimes. With strong bargaining power, hold-up concerns recede and the SSO prefers ex post provided it materially raises R&D. With weak bargaining power, hold-up dominates and ex ante is more attractive. The impact of technological complementarities hinges on whether one or both innovators invest. When only one innovator is active, stronger complementarities tilt the SSO’s preferences toward ex post by increasing the value of combining innovations. By contrast, when both innovators are active, stronger synergies can spur R&D yet crowd out the implementation of the superior standard, thereby favoring the ex-ante regime. Active innovators favor ex-post bargaining because it allows greater appropriation of the standard’s value. Inactive innovators may prefer ex-ante when it induces higher R&D, as they can free-ride on the active party and benefit from the implementation of the superior standard. In aggregate, innovators’ and the SSO’s preferences align whenever ex post boosts R&D and the SSO wields sufficient bargaining power. Finally, we discuss licensing-policy implications and show that hybrid policies - i.e., price caps paired with ex post negotiations - can further raise the SSO’s welfare.