The License of Right, Compulsory Licensing and the Value of Exclusivity

This paper uses the License of Right (LOR) provision implemented in Section 23 of the German Patent Act to answer the following questions: What is the distribution of the private value of the right to exclude others provided by a patent? What are the welfare implications of having a License of Right system? Section 23 of the German Patent Act grants a patentee a 50% reduction on the annual renewal fees if he voluntarily allows anyone to use the invention only in return for reasonable compensation. We build a parametric discrete choice model of patent renewal and LOR declaration to exploit data on granted German patent applications from 1983-1988. Our estimates show that the distribution of the value of the right to exclude others is very skewed and its relative importance rises with patent age. For most patent owners the exclusion right is very valuable. Nevertheless, for a small fraction of patents a commitment to license non-exclusively may even increase the returns from patent protection. The welfare implications of the License of Right system in Germany are twofold. It increases the private value of patent rights but lowers the patent office's revenues. Furthermore, we are able to distinguish between two motives for declaring LOR, the cost-saving and the commitment motive. The fraction of declarations made out of the cost-saving motive is relatively low for young patents but increasing with patent age. In a counterfactual experiment we simulate the impact of making LOR declarations compulsory. We show that a compulsory licensing system could deprive the patent owners of a very substantial part of the incentives currently provided by the patent system.