Licensing Commitments in Standard Setting Organizations

Because standards frequently incorporate patented inventions, standard setting organizations have designed ad hoc policies whereby the owners of such "standard essential patents" must commit ex ante to license them on fair reasonable and non-discriminatory terms to manufacturers of standard-compliant products. However, these commitments may not be sufficient to prevent patent hold-up in practice. In this paper, we develop a simple model to analyze the effect of ineffective FRAND commitments, and compare them with binding commitments on a royalty level or a royalty cap. We show that the cap is systematically preferred by the licensor, while it has ambiguous effects on consumers depending on the licensor's preferred alternative strategy.