Economic Analysis of FRAND Commitment

Abstract

This paper provides an economic analysis of reasonable royalty rates when the patents are selected by a standard-setting organizations (SSOs). Based on the ex-ante auction model proposed by Swanson and Baumol (2005) for determining reasonable rates for FRAND (fair, reasonable and nondiscriminatory) commitment, this paper analyzes and compares the equilibrium outcomes when the SSO selects a standard by profit criterion and by social welfare criterion. It is shown that the social welfare may be lower when the patents are selected to maximize the social welfare rather than to maximize the profits. This paper deals with the case when the upstream patent holders are independent as well as the case when they are vertically integrated with the downstream firms.