Collective Rights Organizations and Investment in Upstream R&D

We examine third-party collective rights organisations (CROs) such as clearinghouses that license innovations on behalf of inventors when downstream uses require licenses to multiple complementary innovations. We consider two simple royalty redistribution schemes, two different innovation environments and two different antitrust rules. We show that in most cases CROs increase incentives to invest in R&D as they increase profits from licensing. However, incentives to invest of inventors who have the unique ability to develop a crucial component may be weakened. We also show that CROs may increase or decrease expected welfare, and are more likely to be beneficial when R&D costs are relatively high, and/or the probability of success for inventors is relatively low.