Efficient Division of Profits from Complementary Innovations

Innovation and Economic Growth

Article Snapshot


Richard Gilbert and Michael L. Katz


Working paper, June 2007


This paper considers how patents affect competition and prices of complicated products.

Policy Relevance

There is no easy way to design patent rules or choose prices from the top down to ensure that firms cooperate to produce complicated technologies for consumers.

Main Points

  • One product such as a microprocessor, telecommunications device, or online auction service might many different types of technology and many patents.

  • Organizing production and deciding how to share revenues or profits is complicated. Badly designed rules for patents and pay-offs harm consumers by making investors less willing to invest.

  • The value of the product depends on everyone’s cooperation. Every contributor gets a share of the value. One patent owner can block the project if his rights are violated.
    • Contributors are also competitors. One might claim a larger share by contributing more technology. Or some might slack off and let the others bear a too-large share of costs. Rules must defuse this potential or investors might hold back.

  • There is no simple rule that a court can use to distribute revenues or profits that avoids all potential problems. The best rule comes close, but in general rewards firms that do research but get no results. It also rewards less for each patent contributed after the first.

Get The Article

Find the full article online

Search for Full Article