Impacts of Supplier Enforced Cross-licensing in a Supply Chain

Problem definition: Qualcomm, the largest cellphone chipmaker in the world, was recently fined RMB 6.088 billion (approximately $975 million) by the Chinese government for alleged anti-competitive conducts including requiring downstream phone manufacturers to cross-license their patents to Qualcomm and its customers. Qualcomm's cross-licensing practice has also received similar charges or scrutiny in South Korea, Japan, European Union, and the United States. Motivated by this practice, we study the impacts of cross-licensing in a supply chain in which an upstream supplier requires its downstream competing manufacturers to cross-license. Manufacturers are asymmetric in their innovation capabilities. Academic/practical relevance: Our study helps firms and policy makers better understand the implications of cross-licensing and provides practical guidelines.Methodology: We build a stylized model of a supply chain consisting of one supplier and two competing manufacturers, and conduct game-theoretic analysis. Results: We find that cross-licensing reduces the total innovation level by downstream manufacturers. In addition, besides the weak manufacturer, even the strong one may benefit from cross-licensing under certain conditions. However, the supplier does not always benefit from conducting the cross-licensing practice. We show that cross-licensing does not always hurt social welfare or consumer surplus as it is accused for. We also find that allowing manufacturers to charge each other royalties benefit manufacturers at the cost of the supplier and consumers. Managerial implications: Our results shed light on how cross-licensing affects innovation, profits and welfare, which have managerial implications to firms in high-tech industries, as well as to policy makers around the world