Shared Ownership of Intangible Property Rights: the Case of Patent Co-Assignments

Shared Ownership of Intangible Property Rights: The Case of Patent Co-Assignments

† ‡ Andrea Fosfuri∗ Christian Helmers Catherine Roux March 10, 2016

Abstract

We show that the legal rules regarding the ability of co-owners of patents to license the patented technology to third parties have important implications not only for licensing, the diffusion of the patented technology, and hence downstream competition, but also the decision to share ownership in the ﬁrst place. The legal rules that regulate shared ownership also affect efforts provided by the parties at the invention stage and hence impact the quality of the patented technology. Furthermore, we also show that legal rules for shared ownership of intangible assets can affect ﬁrms’ incentives to collude in the product market. We rely on exogenous legal differences between the U.S. and Europe concerning the ability of co-owners of patents to license the patented technology to third parties to show that the data are consistent with our theoretical predictions.

JEL Classiﬁcation: K11; O31; O34 Keywords: Property rights; co-ownership; joint patents; R&D cooperation; licensing

∗Bocconi University & CRIOS. Corresponding author. E-mail: [email protected] †Santa Clara University. E-mail: [email protected] ‡University of Basel. E-mail: [email protected].

1 1 Introduction

Shared ownership of property rights is ubiquitous – both among private individuals and legal entities. In the U.S., the law puts few restrictions on individual owners of shared property rights. Joint owners have equal rights to use their jointly owned assets and to unilaterally sell their share. In the case of tangible assets, the right to use a co-owned property right usually does not pose any problems – tangible assets are rivalrous, if one party uses the asset, the other party cannot use it. Intangible assets, however, are non-rivalrous, which means in principle there are no obstacles to multiple parties using the same asset multiple times (Romer, 1990). We show in this article that this can have important implications for the use of a co-owned intangible asset and in fact lead to a tragedy of the commons situation (Hardin, 1968). This in turn has implications for the willingness of parties to engage in the sharing of intangible property rights in the ﬁrst place. It creates a trade-off between any beneﬁts that arise from sharing property rights, most importantly due to increased joint efforts in the creation of the underlying intangible assets, and the costs in form of lack of control over the co-owner’s use of the shared property right. We analyze this tradeoff in the context of patents co-assigned to legally independent companies.1 Jointly owned patents allow us to study the implications of shared ownership rights because there are important differences in the rights allocated to co-owners in different jurisdictions. In the case of the U.S., co-owners of a patent do not need each other’s permission to license the jointly owned property right. This implies, that co-owners can freely license a patent even if this harms directly the other co-owners in the product market (no veto power regime).2 In Europe, in contrast, co-owners can veto unilateral licensing decisions (veto power regime). Since this difference in property right regimes concerns precisely the aspect in which tangible and intangible assets differ, our setting allows us to study the impact of different legal rules concerning the shared ownership of intangible assets.

1We are interested exclusively in patents held jointly by legally independent private companies; we are not concerned with joint patenting by private firms with, for example, universities, other public research institutions, or government agencies. In our empirical analysis, we take account of companies’ ownership structure to ensure patents owned by companies within the same business group are not considered as co-owned patents. Note also that our focus is on co-ownership of the property right a patent represents which is distinct from joint inventorship which defines the intellectual right to the invention. 2Also, enforcement of a jointly owned patent is difficult because all co-owners have to appear as plaintiffs. In addition, a co-owner can deprive another co-owner of the ability to sue for infringement by granting a license to the alleged infringer. For relevant case-law in the U.S. see Ethicon v.United States Surgical Corporation.

2 We show that the legal rules regarding the ability of co-owners of patents to license the patented technology to third parties have important implications not only for licensing, the diffusion of the patented technology, and hence downstream competition, but also the decision to share ownership in the first place. This in turn means that shared ownership can also affect the efforts provided by the parties at the invention stage and hence impact the quality or value of the patented technology. As we show below, an interesting implication of our analysis is that legal rules for shared ownership of intangible assets can also affect firms’ ability to sustain collusion in the product market. Our theoretical discussion generates a number of empirical predictions. We predict that other things equal, firms are more likely to share ownership of a patent in a regime with veto power; yet, provided joint patents are chosen, they are more valuable in a regime without veto power. Finally, joint patents can help sustain collusion in the product market between co-owners in a regime with no veto power. All these differences between the two legal regimes for shared ownership are strengthened when co-owners are close product market competitors. We use the population of patents that are filed at both the U.S. (USPTO) and the European (EPO) patent offices and co-assigned in at least one of the two jurisdictions to show that the data are consistent with our theoretical predictions.3 Our data indicates that co-ownership of patents is less likely in the U.S. even conditional on the parties having decided to share the ownership of their patent (i.e., ownership of the same patent is shared in Europe). This effect is indeed stronger, the closer the co-owners compete in the product market. The data also support the trade-off between the benefits of sharing ownership and the tragedy of the commons, i.e., we find that patents whose ownership is only shared in Europe receive significantly fewer forward citations than patents that are co-owned in the U.S. but single-owned in Europe. This effect is stronger the closer co-owners compete in the product market. Finally, we also find some evidence that supports the notion that shared ownership of patents can help sustain collusion in the product market. Using data on detected cartels, we show that cartels among close product market competitors are more likely to share ownership of patents in the U.S. and not in Europe, which is in line with our theoretical prediction. Our results highlight the importance of differences between tangible and intangible assets for lawmakers. Property rights represent a bundle of rights; we show that one aspect of this bundle, the rules that govern the individual

3Patents are national rights. If a company seeks patent protection in the U.S. and a given European country, the company has to obtain separate rights in each jurisdiction. Such patents on the same invention in multiple jurisdictions are referred to as equivalents.

3 exploitation of jointly owned property rights, can have large effects on parties’ behavior. This effect is, however, specific to intangible assets that are nonrivalrous. Hence, tangible and intangible assets may require different rules. In line with Posner’s argument (Posner, 1973) that common law jurisdictions move toward economic efficiency through case law, one would expect legal systems to create such a distinction between property rights of tangible and intangible assets through case law over time. In civil law jurisdictions, in contrast, these differences could have more persistent effects as they are harder to address through case law. While the extant legal literature has examined the legal complications that arise from the shared ownership of patent rights (Dreyfuss, 2000), little attention has been placed on how joint patents change ex-ante incentives to allocate ownership rights and collaborate in R&D upstream, how they affect competition downstream, and how the corresponding case law has evolved over time (Merges and Locke, 1990; Matt, 2002; Landes and Posner, 2003). Theoretically, the allocation of ownership rights among collaborating parties has been studied within the property rights theory of the firm approach (Grossman and Hart, 1986; Hart and Moore, 1990). The key intuition is that the allocation of patent rights affects each party’s bargaining power when split- ting the surplus generated by their relation-specific investments. Within this tradition, Rosenkranz and Schmitz (1999) show that when two parties invest in human capital and decide on know-how disclosure, joint ownership with bi- lateral veto power can be optimal. Rosenkranz and Schmitz (2003) argue that the optimal ownership structure can change over time, while Schmitz (2008) shows that joint ownership can be optimal if parties have private information about the payoffs they can earn on their own. None of these studies explicitly considers the possibility to exploit the patented innovation through licensing, which is the key mechanism in our paper and a specific consequence of intangible assets being nonrivalrous. Indeed, in our model, licensing directly affects the value (expected profits) each party can extract from the joint research. We also contribute to the substantial body of empirical research on a range of mechanisms employed by firms to share and exchange intellectual property including cross-licensing agreements (Giuri and Torrisi, 2010), patent pools (Layne-Farrar and Lerner, 2011; Lampe and Moser, 2014), and patent commons (Hall and Helmers, 2013), by shedding light on the role played by shared ownership of patents. Legal scholars and practitioners have provided case study evidence on some of the difficulties associated with joint patents (Merges and Locke, 1990). Management scholars have documented the spread of shared ownership of patents across industries and jurisdictions (Hagedoorn, 2003), the relationship between firm value and joint patents (Belderbos et al., 2014) and citations of joint patents by other patents (Briggs and Wade, 2014). How-

4 ever, there is still little systematic evidence with regard to the determinants of firms’ decisions to jointly own a patent, the implications of this decision on the exploitation of the innovation and the incentives to collaborate in R&D in the first place. Moreover, there is no evidence of how these relationships change depending on the legal rules for shared ownership. The remainder of this paper is organized as follows. Section 2 briefly explains the legal framework that governs the joint ownership of patents in the U.S. and Europe. Section 3 contains a discussion of shared ownership of patents and several theoretical predictions. The section also contains our empirical analysis. Section 4 briefly concludes.

2 Legal Background

Patents can be assigned to single or multiple owners. The legal framework that regulates the use of a jointly owned patent, in particular, the allocation of rights to the co-owners, differs across countries. While in all jurisdictions joint owners have the same rights to the intellectual property right regardless of their actual underlying contribution to the patent and are entitled to using the patented invention for their own purposes without the consent of co-owners,4 regulations differ above all with respect to re-assignment and licensing to third parties. Below, we will provide further detail on the legal framework that regulates the use of jointly owned patents in the U.S. and Europe, respectively.

2.1 Joint Ownership under U.S. Law Under U.S. law, inventorship is the starting point for determining ownership because the inventors named in the patent application are presumed to be its owners.5 Patent law requires that all the true inventors of a patent are named in the application, which means in practice that most patents list more than one inventor.6 Inventorship and ownership are, however, separated by law. Under 35 U.S.C. § 261 a patent can be assigned to any party (single ownership) including multiple parties (joint ownership) regardless of the inventorship. Since patents are indivisible (Landes and Posner, 2003, p.30), under 35 U.S.C. § 262 joint owners each own an undivided share in the whole patent

4See, e.g., U.S. Patent Act 35 U.S.C. §101 or UK Patents Act 1977 Section 36.1 and 2. 5See 37 CFR 3.73(a). This applies to applications ﬁled on or after September 16, 2012. 635 U.S.C. § 116 stipulates that when an invention is made by two or more persons jointly, they have to apply for a patent jointly. Failing to list all inventors of an invention on the corresponding patent can lead to the invalidation of the patent; see, for example, Oasis Research LLC v. EMC CORP.et al. No. 4:10-cv-00435.

5 as tenants-in-common.7 Hence, in general, absent any agreement to the contrary, each inventor receives an equal bundle of ownership rights, no matter his contribution to the claims of the patent.8 For a jointly owned U.S. patent, 35 U.S.C. § 262 grants broad powers to each co-owner by stating that, absent an agreement to the contrary, each of the joint owners can exploit the protected invention, which includes the non- exclusive licensing of the patent, without the consent of the other owners.9 Moreover, the law does not require the sharing of any licensing income with the other co-owners. According to a 1850 Supreme Court decision, the legal argument for granting such broad rights is legal certainty.10 It also appears that lawmakers at the time did not consider licensing by a co-owner any different from a co-owner using the patented invention directly or selling the patent.11 The policy argument for the absence of veto power seems to be the creation of an economic environment conducive to the maximum exploitation of the patented technology in the product market (Merges and Locke, 1990; Matt, 2002). First, anyone who wants to obtain a license on the patented technology only needs to obtain it from one of the owners which reduces transaction costs.12 Second, if joint owners had to share the proﬁts they earn from the utilization of the patent, this would reward free-riding co-owners that do not commercialize the technology and, hence, lead to less licensing. This would be an inefﬁcient outcome under the assumption that the licensing of patented technologies promotes the diffusion of technology and advances technological development.

7The legal concept of tenancy-in-common was adopted from English common law (for more discussion on tenancy-in-common, see Sofer (1998) and its legal history see Carrozzo (2001)). 8See, for example, Ethicon, Inc˙v. U.S. Surgical Corp., 135 F.3d 1456 (Fed Cir 1998) and Israel Bio-Engineering Project v. Amgen, Inc., 475 F.3d 1256 (Fed Cir 2007). 9Exclusive licenses can only be granted with the consent of co-owners. For detailed discussion, see AIPPI’s Report Q194 for the U.S. 10The Supreme Court stated that a restriction of patent co-owners’ rights would lead to fraudulent impositions upon persons who desired to purchase the use of the improvement, and would subject a party who, under a mistake as to his rights, used the invention without authority, to be harassed by a multiplicity of suits instead of one (as quoted in Konecny (2000)). 11According to a debate in congress in 1878 to amend the patent statutes, the perception was that tenants-in-common should have the right to fully ‘enjoy’ their patent which consists in making, using, or vending, and in licensing others to do this (Committee on Patents of the Senate and House of Representatives, 1878, p. 382). 12Landes and Posner (2003, p. 318) argue that the absence of a requirement to share proﬁts from licensing or use among co-owners minimizes transaction costs involved in the use of a patented technology.

6 2.2 Joint Ownership under European Law In Europe, there is no harmonized law of joint ownership at the EU level, nor a common concept among national jurisdictions. In particular, the right to exploit the jointly owned patent and to unilaterally grant licenses, in terms of type and scope of the license, may vary from country to country. In the same vein, the right of the co-owners to be compensated by the licensing party can be differently regulated or be absent altogether. However, overall, the legal treatment of joint patents in Europe differs from the U.S. For instance, while German law allows each co-owner to exploit the protected invention individually including its re-assignment, owners of German patents cannot license the jointly owned patents without the consent of the co-assignees (§ 743 and 744 BGB).13 The law contains the same restrictions with regard to licensing in other European countries, including the UK (The Patents Act, Section 36.3),14 France (Article L. 613-32 Code de la Propriété Intellectuelle),15 the Nether- lands (Art. 66 Patent Act 1995),16 and Switzerland (Art. 34.2 Bundesgesetz über die Erfindungspatente).17 Note that these national rules also apply to patents that are granted by the European Patent Office (EPO) because any patent granted by the EPO has to be validated with the national patent office of any member state of the European Patent Convention. This means that the EPO patent that has been validated in a national patent office is subject to national legislation.

2.3 Contractual Agreements Both in the U.S. and Europe, there is the possibility to sign a private agreement that contains provisions that deviate from the default stipulated by the law. That is, unless co-assignees sign a contract in the U.S. that forbids each co-assignee to license the jointly owned patent without consent from the other co-assignees, the statutory rule applies and no consent is needed. Analogously, in Europe, co-assignees can agree to grant each co-assignee the right to freely license the joint patent. Regardless of the jurisdiction, deviating from the default rule by signing a contract generates transaction costs as it requires an agreement among all co-assignees. Moreover, any agreements that contract around

13For detailed discussion, see AIPPI’s Report Q194 for Germany. 14For detailed discussion, see AIPPI’s Report Q194 for the U.K. 15In the case of France, a co-assignee may oppose the grant of a non-exclusive license only under the condition that he ‘buys out’ the co-assignee that desires to grant a license. Exclusive licenses can be vetoed without the ‘buy out’ obligation (Article L. 613-29 Code de la Propriété Intellectuelle). See AIPPI’s Report Q194 for Switzerland. 16For detailed discussion, see AIPPI’s Report Q194 for the Netherlands. 17For detailed discussion, see AIPPI’s Report Q194 for Switzerland.

7 the default are only binding between the parties to the contract whereas the default, which is determined by property law, is automatically binding vis-à-vis third parties. Private contracts around the default are only enforceable with regard to third parties if they are duly notified of any such deviation from the statutory default, although even then enforcement is uncertain. As an example, take an agreement that stipulates that neither of the co-owners of a joint U.S. patent can unilaterally exploit the patented technology without the consent of the other owners. Such an agreement may not be enforceable against a third party that purchases a license in good faith of one of the co-owners without notice of the contractual restrictions between the joint owners (35 U.S.C. § 261 and Banks et al. (2011)). Or, by way of another example, under German Law agreements to transfer the joint invention to a third party with the goal of causing damage to the co-owner are void (§ 226, 826 BGB and Banks et al. (2011)). Hence, although parties are free to contract around the legal default, con- tracting around is likely to be difficult as it requires consensus and creates transaction costs. Property law, which regulates the default with regard to shared ownership, is also generally considered stronger than contract law (Fried- man, 2001). Hence, it is reasonable to assume that there is a difference between an ex post contractual right and an ex ante statutory veto in form of the legal default. There is in fact a large legal literature on the role of default rules which ar- gues that parties tend to stick with default rules even when they can contract around them (Johnston, 1990; Ayres and Gertner, 1992; Ben-Shahar and Pot- tow, 2006). Experimental evidence supports these findings by showing that individuals prefer the default rules over deviating from them irrespective of the content of the default rules (Korobkin, 1998). As a result, the legal default has an important effect on parties’ behavior (Sunstein, 2001).18 In addition, when drafting such agreements, terms and conditions have to respect U.S. and European antitrust law where in particular U.S. antitrust regulations may be critical of contracts around the default rule that prohibit the licensing of a jointly owned patent.

18Overall, the ﬁnding that default effects are important in decision making is one of the most robust results in applied economics recently (DellaVigna, 2009). See, for example, DellaVigna and Malmendier (2006) on defaults in contractual choice in health clubs, Madrian and Shea (2001) and Cronqvist and Thaler (2004) on defaults in retirement planning, and Johnson and Goldstein (2003) on defaults in organ donation.

8 3 Theory and Empirical Evidence

Under the legal default,19 the differences across jurisdictions mean that co- owners in the U.S. can freely license the co-owned patent to third parties (no veto power) whereas in Europe, co-owners can stop each other from licensing (veto power). This difference concerns the crucial element that distinguishes tangible from intangible assets, that is, a patented invention can be licensed to multiple parties simultaneously. In this section, we show that the legal rules that govern the sharing of ownership rights of an intangible asset have important implications not only for the decision to share ownership, but also upstream for the decision to jointly create the intangible asset and downstream for the use and diffusion of the jointly owned asset. Moreover, using the same logic, we also demonstrate that such legal rules can affect ﬁrms’ propensity to collude in the product market. Below, we discuss these different implications theoretically and offer supporting empirical evidence. The online appendix contains a stylized model that illustrates some of the assumptions underlying our theoretical arguments and subjects their robustness to more formal scrutiny. The online appendix also contains a detailed description of the data used in this section.

3.1 Licensing and Competition in the Product Market Firms that pool their resources in a research joint venture (RJV) to conduct R&D cooperatively are often competitors in the product market (d’Aspremont and Jacquemin, 1988; Kamien et al., 1992). If these ﬁrms patent the innovation and share ownership of the patent, competition in the product market may take two forms: either the joint owners exploit the patented technology internally to develop the product and compete in a duopoly, or the joint owners license the technology to product market entrants that potentially compete with them in an oligopolistic marketplace.20 Whether and how much a joint owner licenses depends, however, on the legislation under which the joint patent falls. Under the no veto power regime, joint ownership of a patent by product market competitors can lead to a tragedy-of-the-commons situation (Hardin, 1968): if each of the co-owners acts in its self-interest, it will license the patent to more entrants than it would if co-owners decided together on licensing. This

19In what follows, we assume that, notwithstanding the possibility to sign a private agreement, the legal default regulates the behavior of the co-owners of a patent. 20In some industries, for example, chemicals, semiconductors and computers, licensing is important as a means of generating revenues from innovations. In many instances, ﬁrms in these industries license their technology to other companies that can potentially compete with them (Arora and Fosfuri, 2003).

9 situation arises because licensing affects a joint owner’s profit in two ways: first, selling an additional license increases an owner’s profit. As joint owners do not have to share their licensing revenue, the royalties paid by the licensee fully accrue to the owner who licensed the technology. The second effect, however, counteracts this revenue effect. Selling an additional license intensifies competition in the product market. Although the owner experiences erosion of profits in her own business, this loss is shared with the other owners such that the licensor does not fully internalize the reduction in industry profits. The relative strength of these two effects depends on how close the owners compete in the product market. When the good is highly differentiated, each owner has a well-defined market niche. Assuming that entrants are close product market competitors with their licensor,21 the licensor internalizes the increased competition to a greater extent. When the good is homogeneous instead, the negative effect on profits due to increased competition is spread across all owners while only the licensor receives revenue from its licensees. Therefore, from the perspective of the owners, joint patenting leads to too much licensing and competition in the product market, and both increase when the good is less differentiated. Jointly, all co-owners would benefit from restricting their licensing activity. The veto power regime, in contrast, leads to a tragedy-of-the-anticommons situation (see Heller (2013), for a concise introduction). Each of the co-owners prevents the others from licensing the jointly patented technology. Licensing by a product market competitor negatively affects the co-owners’ profits by increasing competition in the product market without counterbalancing the effect through royalty revenue. Each co-owner thus vetoes another co-owner’s decision to license the jointly patented technology. Hence, under the veto power regime, licensing associated with joint patents is lower than in the absence of veto power. Since incentives to individually over-license decrease with the degree of product differentiation, the difference between licensing rates under the two regimes decreases with the degree of product differentiation. Summarizing,

Proposition 1. Other things equal, under shared ownership of a patent, the closer co-owners compete in the product market, the more unilateral (over-)licensing occurs in a no veto power regime (the U.S.). No unilateral licensing occurs in a veto power regime (Europe) regardless of how closely co-owners compete in the product market.

21This is consistent with existing empirical evidence that shows that it is difficult to find licensees in unfamiliar markets (Contractor, 1981) and that downstream production is positively associated with licensing (Matt et al., 2015). Fosfuri (2006) finds a negative association between product market differentiation and the rate of technology licensing in the chemical industry. 10 Proposition 1 describes the basic mechanism through which shared ownership of patents affects the behavior of the co-owners. Under shared ownership, each co-owner has an incentive to unilaterally license the co-owned asset. Since in a no veto power regime, co-owners do not have the ability to stop each other from licensing, over-licensing occurs. In a veto power regime, co-owners block each other’s licensing, and, hence, no licensing occurs unless all parties agree to do so. The following sections derive several theoretical predictions that follow directly from the mechanism described by Proposition 1 which we will test empirically.22

3.2 Joint Research and the Use of Joint Patents Firms will anticipate the effects of shared ownership of patents on licensing and downstream competition. In this section, we discuss how the effects that we have discussed above affect firms’ decisions upstream to share ownership of a patent and how the latter, in turn, affects the efforts undertaken by the firms in collaborative R&D. Firms collaborate in research for a number of reasons. Pooling resources reduces risks, creates scale economies, leverages complementary skills, internalizes spillover effects, and stimulates explorative search (Röller et al., 2007; Majewski and Williamson, 2002; Kamien et al., 1992; Jacquemin, 1988; Katz, 1986). We take the decision to collaborate in R&D as given.23 This allows us to focus on individual efforts exerted by firms in joint research. Notice that when innovative efforts are not contractible (Aghion and Tirole, 1994), they vary as a function of the firms’ decision to share ownership of the patented invention

22 Testing empirically Proposition 1 would require information on the number of licensing agreements associated with a jointly owned patent, i.e., licensing information at the patent- level. Such data are extremely hard to come by. Existing studies that rely on licensing data at the patent-level are all limited to very small samples in narrow sub-sectors, mostly the biomed- ical industry (see Gans et al. (2008); Allain and Kyle (2013); Deepak and Luo (2015)). Never- theless, we can gauge the empirical relevance of Proposition 1 by comparing those industries in our data that have the largest number of patents that are co-owned in the no veto power regime (the U.S.) but single-owned in Europe (see section 3.2 for details on the approach) to the industries known to rely most heavily on licensing (Arora and Gambardella, 2010). We find indeed sectors known to rely heavily on licensing to also have the largest number of co-owned patents in the U.S. in our data: Manufacture of chemicals and chemical products (ISIC 20), Manufacture of computer, electronic and optical products (ISIC 26), Manufacture of basic pharmaceutical products and pharmaceutical preparations (ISIC 21), Manufacture of machinery and equipment n.e.c. (ISIC 28). 23This assumption is relatively weak. For example, if each firm’s knowledge input is essential, the firms have to collaborate to generate an innovation. Alternatively, extant research has shown that research collaborations are crucial when incoming spillovers are sufficiently large (Cassiman and Veugelers, 2002).

11 that results from their joint research because such decision affects the value appropriated by each firm. Shared ownership of patents attributes equal rights to each collaborating party and hence allows in principle for an equal distribution of the value of the innovation. Belderbos et al. (2014) report that shared ownership of patents instills a sense of fairness in the distribution of the outcome of joint research which, in turn, spurs trust and stimulates innovative efforts. Firms have nev- ertheless other options to allocate ownership rights. A common solution is to assign ownership to only one company and give the other party exploitation rights via an (exclusive) licensing agreement.24 Alternatively, patent claims can be split into multiple patents assigned individually to the different parties. For our purposes, we focus on the decision to either share ownership or assign the patent to a single party since any allocation that avoids patent co-ownership is unaffected by the legal regime that governs exploitation rights under shared ownership. Under the no veto power regime, joint owners of a patent can freely license the patent thereby inducing entry and enhancing product market competition. In equilibrium, licensing beyond the jointly optimal level reduces individual profits. Lower profits decrease incentives to share ownership in the first place. Since, according to Proposition 1, the “over-licensing effect” is stronger the closer companies compete in the product market, the lower are incentives to share ownership under the no veto power regime. Shared ownership thus creates a trade-off between maximizing joint research effort on the one hand and lower profits due to over-licensing on the other hand. This trade-off, which only exists in the no veto power regime, is affected by two factors which work in opposite directions: (a) the value of collaboration, the more important joint effort is for the value of an innovation, the more likely firms share ownership of a patent; (b) the closer firms compete in the product market, the stronger the effect of over-licensing on payoffs. In the veto power regime, in contrast, over-licensing does not occur, hence the only effect at work is (a) the impact of shared ownership on research efforts. Thus, because (b) is only present in a regime with no veto power, factor (a) must be stronger than in a regime with veto power for having patent co-ownership chosen as the preferred allocation of patent rights, other things equal. The differences in legal regimes, therefore, affect individual research efforts through their impact on private payoffs from shared ownership of a patented invention. Putting these different elements together allows us to state the following theoretical predictions:

24We obtained that information from conversations with various patent attorneys in the U.S. and Europe.

12 Prediction 1. Other things equal, shared ownership of a patent is less likely in a no veto power regime (the U.S.) than in a veto power regime (Europe), where the closer co-owners compete in the product market, the larger is the difference. Prediction 2. Other things equal, conditional on shared ownership, the patented invention is on average of lower quality in a veto power regime (Europe) than in a no veto power regime (the U.S.), where the closer co-owners compete in the product market, the larger is the difference. In order to investigate Predictions 1 and 2 empirically, we rely on ﬁrms’ decisions to share ownership of the same patent in the U.S. and Europe. We focus on so-called equivalents, that is, inventions that are patent-protected in both the U.S. and Europe (for more details on the data see online Appendix C). Since the USPTO and EPO patents protect the same invention, differences in assignment patterns between the U.S. and Europe for a given patent cannot be attributed to differences between inventions. All patents also have in common that companies have decided to share their ownership in at least one of the two jurisdictions. Hence, we can attribute differences in ownership assignments between the two jurisdictions to the differences in the legal regimes governing the co-ownership of patents in the U.S. and Europe.25 Table 1 shows that there are three ownership types: (a) joint ownership in the U.S., single ownership in Europe; (b) joint ownership in the U.S., joint ownership in Europe; (c) single ownership in the U.S., joint ownership in Europe.

Table 1: EPO-USPTO ownership patterns USPTO P P PP Joint PP Single PP PP PP PP Joint PP Joint PP PP EPO P Joint PP PP Single PP

To test Prediction 1 we ask directly whether companies that co-assign a patent at the EPO (where co-assignees have veto power), choose not to co- assign ownership of the same invention at the USPTO (where co-assignees

25Note that we focus on co-assignment between corporate owners, hence differences in assignments cannot result from initial assignments to inventors in one jurisdiction but not the other. Note also that we have dynamically tracked business group ownership across ﬁrms over time and assigned patents to the corresponding ultimate corporate owners to avoid counting shared ownership within the same business group as a co-assignment.

13 do not have veto power). If the legal differences that apply to co-ownership have an effect on companies, we would expect systematic differences in co- assignments for the same invention. Table 2 shows that in 27 percent of patents that are co-assigned in Europe, ownership is assigned to only one of the co-owners in the U.S.26 Since co- ownership in Europe involves the right to veto the licensing of the co-owned patent, the fact that in more than a quarter of patents, co-owners decide to assign the same patent in the U.S. to only one owner provides prima facie evidence that co-ownership in the U.S. has negative implications and is therefore avoided if possible, as suggested by Prediction 1. However, there is still the possibility that differences in co-ownership between the U.S. and Europe are explained by other factors, for example, revenue sharing agreements, data errors, etc. We can account for this by comparing changes in co-assignment for patents that are co-assigned in Europe and single-owned in the U.S. with patents that are co-assigned in the U.S. and single-owned in Europe. That is, if the decision to assign a patent that is co- owned in Europe to only one party in the U.S. is largely explained by factors other than the absence of a veto right, we would not expect any systematic difference between the cells marked in color in Table 1. Instead, Table 2 shows that in only 16.68 percent of patents that are jointly owned in the U.S. the ownership is assigned to an individual party in Europe. Note that Table 2 in fact provides stronger evidence than implied by Predic- tion 1. Prediction 1 only states that firms that collaborate in R&D are less likely to share ownership of a patent in the U.S. than in Europe. This includes the case where the firms decide to assign the patent to a single party. Our analysis requires instead that these firms still share ownership of the same patent in Europe. Prediction 1 also suggests that the results shown in Table 2 should be more pronounced the closer co-owners compete in the product market. To analyze the association between product market competition and the co-ownership of patents, we estimate the following specification at the dyad-patent-level:27

C Ji jk = α + µPMi j + "i jk (1)

C where Ji jk denotes the probability that ﬁrms i and j share the ownership of patent k where C denotes the following ownership patterns: (a) joint ownership in the U.S., single ownership in Europe, (b) joint ownership in both the

26See Table A-1 in the online appendix for a breakdown for industries known to rely heavily on licensing (see also footnote 22 above). 27Each equivalent that is co-owned by two ﬁrms in at least one jurisdiction constitutes one observation. When equivalents are co-owned by more than two ﬁrms we include all possible dyads.

14 Table 2: Differences in joint ownership – U.S. vs Europe

USPTO Joint Single Total ` ` X `` 83.32% `` 72.78% XX 72.78% Joint ``` ``` XX 72.99% ```` 27.01% ```` 10,245 XXX ``` Single ``` 16.68% EPO 72.78% ```` X XX 8,975 Total XX 72.78% XXX

Notes: The table cross-tabulates the ownership pattern of patents that have been ﬁled at both the EPO and the USPTO. It shows the percentage of patents that are co-owned at both the EPO (73%) as well as at the USPTO (83%) relative to the total of jointly owned patents with a U.S. and EPO equivalent (10,245 and 8,975 ﬁlings respectively). The table shows that 27% of patents that are co-owned at the EPO are assigned only to a single party at the USPTO. In contrast, only 17% of patents that are co-owned at the EPO are assigned to a single party at the USPTO.

U.S. and Europe, and (c) single ownership in the U.S. and joint ownership in

Europe. PMi j denotes product market proximity between ﬁrms i and j – the 28 larger PMi j, the closer i and j compete in the product market. According to our theory, if companies want to avoid the lack of control over their co-assignee’s licensing decisions, they should be more likely to assign ownership to a single party in the U.S. the closer product market competitors they are. In contrast, in the case of joint ownership in the U.S., our theory suggests a negative association. Table 3 shows the results from a simple descriptive logistic regression of the equation in (1) where the dependent variable is equal to one if a patent is of ownership type (a) in columns (I) and (II), (b) in columns (III) and (IV), and (c) in columns (V) and (VI). The results in Table 3 are clear-cut: we see a negative association between product market proximity and the likelihood of

28Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefficient of the resulting binary vectors of 2-digit ISIC codes for firms i and j, which is computed 1/2 as PMi j = SiS0j/[(SiSj)(Sji)] where Si and Sj are firm i’s and j’s binary vectors that indicate whether firms i and j are active in a given 2-digit ISIC industry. Relying on this measure of product market proximity has the advantage that we can rely on the entire set of USPTO-EPO equivalents. To obtain a SIC-based measure of product market proximity, we would have to match the patent assignees to firm-level data, which would invariably entail a significant and potentially non-random loss of data. To investigate the severeness of this issue, we matched assignee names to Compustat and Bureau van Dijk’s Amadeus database. Our matched dataset contained only 13 percent of assignees contained in the patent data. Apart from avoiding this dramatic and non-random loss of data, our measure of product market proximity based on the IPC-ISIC mapping also has the advantage that it is continuous between zero and one whereas relying on companies’ SIC codes means we would only obtain a discrete zero/one measure. 15 Table 3: Co-ownership and product market proximity

Dependent variable: US: co-owned US: co-owned US: single owned co-ownership type EP: single owned EP: co-owned EP: co-owned (I) (II) (III) (IV) (V) (VI)

product market Proximity† -0.038*** -0.042*** -0.047** -0.041* 0.086*** 0.094*** (0.014) (0.013) (0.022) (0.022) (0.020) (0.019)

IPC Dummies No YES No YES No YES # Obs. 13,918 13,939 13,939

Notes: † Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefficient of the resulting vectors of 2-digit ISIC codes for firms i and j. Logit estimates. Marginal effects reported. The sample consists of USPTO-EPO equivalents where at least in one jurisdiction the patent is co-owned. Robust standard errors clustered at the firm-pair-level – standard errors reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. shared ownership of a patent in the U.S., whereas product market proximity is positively associated with single ownership in the U.S. and shared ownership in Europe. In other words, companies that compete closely in the product market are more likely to assign a patent to a single party in the no veto power regime or, put differently, they are less likely to share ownership of a patent in the no veto power regime. To show that this relationship holds across the entire range of our continuous measure of product market proximity, Figure 1 shows the predicted probabilities obtained from estimating the equation in (1) as a nonparametric local logistic regression plotted against our measure of product market proximity. The figure shows that co-ownership in the U.S. is strongly negatively associated with product market proximity whereas the opposite is true for single ownership in the U.S. as suggested by Prediction 1. Next, we analyze the empirical evidence for Prediction 2. Our discussion suggests that, provided companies choose to share ownership of a patent in the U.S., the benefits from doing so outweigh the potential costs. Hence, on average, inventions should be of higher quality/value if they are protected by co-owned patents in the U.S. than if the corresponding patents are single- owned. We investigate this empirically by asking whether patents that are single-owned in the U.S. and co-owned in Europe receive fewer forward citations than patents that are co-owned in the U.S. and single-owned in Europe.29

29It is not possible to compare citations within equivalents, i.e., to ask whether the single- owned U.S. equivalent obtained more citations than the corresponding co-owned European equivalent because citation behavior differs substantially between the two jurisdictions (for example, applicants are required to cite any relevant prior art in U.S. patent ﬁlings whereas no such obligation exists at the EPO).

16 Figure 1: Co-ownership and product market proximity

Co-owned in U.S. Co-owned in U.S. Single-owned in U.S. Single-owned in Europe Co-owned in Europe Co-owned in Europe .2 .18 .73 .18 .16 .72 .16 .14 .71 .14 .7 .12 Pr(Co-owned in U.S. - Co-owned Europe) Pr(Co-owned in U.S. - Single-owned Europe) Pr(Single-owned in U.S. - Co-owned Europe) .12 .1 .69 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 Product Market Proximity Product Market Proximity Product Market Proximity

Notes: Shows predicted probabilities obtained from estimating equation (1) using a nonparametric local logistic regression. The sample consists of USPTO-EPO equivalents where at least in one jurisdiction the patent is co-owned. The dependent variable for the left-hand side plot is (a) joint ownership in the U.S., single ownership in Europe; for the plot in the middle: (b) joint ownership in both the U.S. and Europe, and for the right hand-side plot: (c) single ownership in the U.S. and joint ownership in Europe. Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefﬁcient of the resulting vectors of 2-digit ISIC codes for ﬁrms i and j.

Forward citations are a well-established metrics to proxy for the value of innovations (Trajtenberg, 1990; Hall et al., 2005). We collect all forward citations received by the U.S. patents of our U.S./Europe set of equivalents. Focusing on citations to only U.S. patents ensures compa- rability between equivalent sets. It also results in a larger number of citations, regardless of ownership type, as commonly U.S. patents tend to contain more forward citations due to legal disclosure obligations and a tendency to cite other U.S. patents. Table 4 shows descriptive statistics for our set of patents. The table distinguishes between patents and equivalent groups, where equivalent groups can contain several patents – they all share the same priority patent and hence are related to the same underlying invention. Hence, looking at forward citations at the equivalent group level is slightly more closely related to the concept of measuring value at the invention-level. We see that patents that are co-owned in the U.S. but single-owned in Europe represent the smallest number of patents. They also have the lowest share of patents with any forward citations. That said, the average number of citations for patents with positive citation counts is larger than that for any of the other two ownership categories – as would be expected in line with our theoretical discussion. This suggests that patents whose ownership is only shared in the no veto power regime attract more citations than any of the other types of patents.

17 Table 4: Co-ownership and patent citations: descriptives

Co-ownership type Total patents Share with citations Total citations

All Equivalence All Equivalence All Equivalence patents group patents group patents group

US: co-/EP: single owned 1,491 996 33.46% 49.19% 5,341 5,308 US: single-/EP: co-owned 2,753 1,702 40.31% 64.15% 11,685 11,626 US: co-/EP: co-owned 7,452 4,439 38.67% 63.73% 27,546 27,411

All patents† Equivalence group†

Average SD Average SD

‡ US: co-/EP: single-owned 2.460 2.679 2.499 2.807 US: single-/EP: co-owned 2.241 2.314 2.251 2.330 US: co-/EP: co-owned 2.198 2.589 2.209 2.602

Notes: † Average number of forward citations by patent-citation lag; includes only patents with non-zero citations. ‡ Differences between ownership type US: co-/EP: single-owned and the two other groups is statistically signiﬁcant at 1% for all patents and equivalence groups. SD: standard deviation.

In order to investigate this further and to test whether the negative relationship between shared patent ownership and forward citations in Europe is stronger the closer the co-owners compete in the product market, we estimate speciﬁcation 2 at the patent-level using a negative binomial estimator:

T S X X Cks = β + αt I(year = t) + γs I(lag = s)+ t=1 s=0 b c c + ηJk + ϕJk + µPMk + πJk PMk + "ks (2) × where Cks is the forward citation count for patent k in citation lag s, which is deﬁned as the difference between priority dates of citing and cited patent. b t denotes the priority year of cited patent k. Jk is a dummy variable that is c equal to one if the patent is co-owned in both Europe and the U.S., and Jk is equal to one if the patent is co-owned in Europe but single-owned in the U.S.; hence, the omitted category is whether a patent is co-owned in the U.S. but single-owned in Europe. PMk denotes product market proximity measured at c the patent-level (see above) and Jk PMk is the interaction effect of ownership 30 type (c) and product market proximity.× "ks is a random error term. Table 5 shows in column (I) that patents of both ownership types (b) and (c) are associated with fewer forward citations than patents that are only co- owned in the U.S. and single-owned in Europe, which is in line with Predic-

30Note that in case a given patent is owned by more than two parties, we compute the average product market proximity between co-owners.

18 Table 5: Co-ownership and patent citations: regression results

Dependent variable: Number of forward citations All patents Equivalence group

(I) (II) (III) (IV) (V) (VI)

US: single-/EP: co-owned -0.064* -0.065* 0.426*** -0.066* -0.067* 0.425*** (0.034) (0.034) (0.092) (0.034) (0.034) (0.092) US: co-/EP: co-owned -0.207*** -0.206*** -0.203*** -0.208*** -0.207*** -0.205*** (0.031) (0.031) (0.031) (0.031) (0.031) (0.031) product market Proximity† 0.105** 0.252*** 0.108** 0.256*** (0.043) (0.050) (0.044) (0.050) US: single-/EP: co-owned -0.639*** -0.640*** product market Proximity† × (0.108) (0.109)

Citation lag dummies YES YES YES YES YES YES Priority year dummies YES YES YES YES YES YES # Obs. 94,311 92,631

Notes: Omitted ownership type is (a) joint ownership in the U.S., single ownership in Europe; † Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefficient of the resulting vectors of 2-digit ISIC codes for firms i and j. If a given patent is owned by more than two parties, we compute the average product market proximity between co-owners. Negative binomial regression. The sample consists of USPTO-EPO equivalents where at least in one jurisdiction the patent is co-owned. Robust standard errors reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. tion 2. When we add our measure of product market proximity in column (II) we see that it enters positively, which means patents that are co-assigned to product market competitors tend to receive a larger number of citations. How- ever, the interaction term of product market proximity and ownership type (c) in column (III) is negative and statistically highly significant. Yet, the coefficient on ownership type (c) – single-owned in the U.S. and co-owned in Europe – turns positive and is statistically highly significant. This implies that the negative effect of ownership type (c) relative to ownership type (a) – co-owned in the U.S. and single-owned in Europe – applies only to patents co-owned between close product market competitors. Figure 2 visualizes the interaction effect shown in column (III) and shows that the effect on forward citations is decreasing as product market proximity increases and turns negative for product market proximity above 0.7. The results at the equivalent group, i.e., invention-level, shown in columns (IV) to (VI) are very similar to those at the patent-level shown in columns (I)-(III). Hence, the results shown in Table 5 indicate that the closer companies compete in the product market, the fewer citations the patent receives, provided it is assigned to only a single party in the no veto power regime.

19 Figure 2: Co-ownership and patent citations: Interaction effect .4 .2 0 Predicted number of forward citations -.2 0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1 Product Market Proximity

Notes: Shows marginal effect of product market proximity on forward citations for ownership type US: single-/EP: co-owned shown in Column (III) of Table 5.

3.3 Joint Patents and Product Market Collusion The previous sections have shown that shared ownership of patents can affect upstream and downstream behavior of the co-owners of a patent. In this section, we show that the same mechanism that disincentivizes the sharing of ownership of patents in a no veto power regime can be used by companies to help sustain collusive behavior in the product market. Hence, counter- intuitively, the lack of control over the joint property right provides the main motivation for firms to share the ownership of a patent. This offers an alternative explanation for the sharing of patent ownership.31 The intuition is straightforward and follows directly from Section 3.1 (online Appendix B contains a model that shows this more formally). In an infinitely repeated game, collusion occurs when the payoffs of a firm’s unilateral deviation from the collusive agreement, which typically involves joint profit maximization, are not enough to compensate for a reversion to a fully competitive situation, where companies make their own best-response decisions. The choice of any given firm in any given period thus will depend on how much it

31Recent empirical evidence supports the notion that collaboration between companies in form of RJVs can serve a collusive function (Duso et al., 2010; Goeree and Helland, 2009). For theoretical contributions on the potential for product market collusion among RJV members see, for example, Greenlee and Cassiman (1999); Martin (1995); d’Aspremont and Jacquemin (1988). Our evidence is complementary to this branch of research and may indicate that ﬁrms use multiple tools related to their innovative activity to sustain product market collusion.

20 values the future (i.e., the discount factor it applies to future payoffs), the one- shot gains from deviation, and the severity of the punishment once deviation is detected. The latter is a function of the extent of competition in the product market. In a regime with no veto power, co-owners can freely license their joint patent to entrants. We have argued in section 3.1. that this creates a tragedy- of-the-commons situation, where joint patenting leads to too much licensing and competition in the product market. This problem is more severe when patent co-owners are close product market rivals. By contrast, excessive licensing is not a concern in a regime with veto power. Thus, in a regime with no veto power, sharing the ownership of a patent might increase the severity of the punishment which is triggered when firms deviate from the collusive agreement (Ayres, 1987; Williamson, 1983). More- over, the closer co-owners of a patent compete in the product market, the stronger the punishment will be because a joint patent leads to greater licensing and competition. This, in turn, will make collusion in the product market more likely. This logic implies that if shared ownership of patents is used to help sustain collusion, the probability to co-assign a patent should be increasing in the product market proximity between co-assignees in the no veto power regime, a strikingly different conclusion from what we reached in Prediction 1. We can use this insight to formulate an empirically testable prediction about collusive agreements conditional on shared ownership of patents: Prediction 3. Other things equal, conditional on shared ownership, collusive agreements between companies are more likely in a no veto power regime (the U.S.) than in a veto power regime (Europe), where the closer co-owners compete in the product market, the larger is the difference. To test this prediction, we look directly at the association of the co-ownership of patents, product market proximity and actual collusive agreements. Out of all 8,369 firm pairs in our patent data that share the ownership of a patent, we find 101 firm pairs (1.2%) to have been successfully prosecuted by antitrust authorities for colluding (for more details on the data see online Appendix C). These firm pairs are considerably closer in the product market, the mean for our product market proximity measure is 0.87 whereas that of all other firm pairs is only 0.71 (the difference in means is statistically significant at 1%). Figure 3 visualizes this relationship between the probability of having been found to collude and product market proximity. It thus provides direct evidence on the theoretical prediction. It shows that the probability that two companies that co-own a patent have been found guilty of collusion increases in the product market proximity of the two companies.32

32Note that the positive relationship between product market proximity and the probability 21 Figure 3: Discovered cartels and product market proximity conditional on patent co-ownership

Notes: Shows predicted probabilities obtained from estimating Ci j = α + µPMi j + "i j (where Ci j = 1 if companies i and j have been found to collude in the product market) using a nonparametric local logistic regression. The sample consists of companies that have at least one USPTO-EPO equivalent where at least in one jurisdiction the patent is co- owned. Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefﬁcient of the resulting vectors of 2-digit ISIC codes for ﬁrms i and j.

The main concern with Figure 3 is that firms have stronger incentives to collude the closer they compete in the product market to begin with. Hence, the positive correlation between product market proximity and engaging in collusive behavior shown in Figure 3 may hold regardless of whether companies share the ownership of a patent. Figure 4 addresses this concern by limiting the sample to only company pairs that have been found to have colluded. The figure plots predicted probabilities of two firms that have been found to collude sharing the ownership of a patent where we distinguish again between the three ownership types: (a) joint ownership in the U.S., single ownership in Europe, (b) joint ownership in both the U.S. and Europe, and (c) single ownership in the U.S. and joint ownership in Europe. The left-hand-side plot displays a similar shape as in Figure 3, that is, the closer firms compete in the product market, the more likely they are to share the ownership of a patent only in the U.S. but not in Europe. The figure in fact suggests firms only tend to share ownership of a patent in the no veto power regime if they are close product market competitors. Figure 4 also shows that the relationship between ownership types (b) and (c) and product market proximity are in fact negative, the closer companies compete in the product market, the less likely companies are to share ownership of a patent; this result, in particular for ownership type (b), to have been found to collude is robust to different assumptions regarding the timing of patent filings (as measured by their priority year) and the collusive agreements (as measured by their start date).

22 is consistent with our Prediction 3. Table A-2 in the online appendix shows that the patterns displayed in Figure 4 are robust to controlling for additional factors known to affect collusion (Hay and Kelley, 1974; Frass and Greer, 1977; Levenstein and Suslow, 2006).

Figure 4: Patent co-ownership and product market proximity conditional on discovered cartels

Co-owned in U.S. Co-owned in U.S. Single-owned in U.S. Single-owned in Europe Co-owned in Europe Co-owned in Europe .15 .38 .94 .92 .36 .1 .9 .34 .88 .05 .32 .86 Pr(Co-owned in U.S. - Co-owned Europe) Pr(Single-owned in U.S. - Co-owned Europe) Pr(Co-owned in U.S. - Single-owned Europe) .3 .84 0 .2 .4 .6 .8 1 .2 .4 .6 .8 1 .2 .4 .6 .8 1 Product Market Proximity Product Market Proximity Product Market Proximity

C C Notes: Shows predicted probabilities obtained from estimating Ji j = α+µPMi j +"i j where Ji j denotes the probability that firms i and j share the ownership of a patent where C denotes the following ownership patterns: (a) joint ownership in the U.S., single ownership in Europe, (b) joint ownership in both the U.S. and Europe, and (c) single ownership in the U.S. and joint ownership in Europe. The sample consists only of company pairs that have been found to collude in the product market and that have at least one USPTO-EPO equivalent where at least in one jurisdiction the patent is co-owned. Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefficient of the resulting vectors of 2-digit ISIC codes for firms i and j. Finally, to provide some additional insight, Table A-3 in the online appendix lists the top 20 companies in terms of product market proximity that co-patent and that have been successfully prosecuted for product market collusion. Take, for example, the pair Deutsche Telekom and France Telecom. Both are telecom- munication operators. In the past, the two companies have been found to collude three times (the relevant markets were mobile phone roaming fees, and mobile phone operations). Deutsche Telekom and France Telecom also share the ownership of a patent in Europe (EP2410516) and the U.S. (US8566082) with a 2007 priority date. Similarly, Samsung and Panasonic have an extensive history of collusive agreements; our data reveals a total of six collusive agreements between 1995 and 2010.33 Samsung and Panasonic in fact share the ownership of two patent families that protect inventions related to optical disk drive technology with priority dates in 2002 and 2003. According to

33The markets concerned were: liquid crystal displays, TFP (thin ﬁlm) type, cathode ray tubes, color display tube type, optical disk drives, and battery cells.

23 our data, the cartel in the optical disk drives market lasted between 2004 and 2010. Another example is NXP and STMicroelectronics, both companies are in the semi-conductor industry. They have been found to collude in the ‘memory chips for smart cards’ market until 2009 and they co-own two USPTO- EPO patent families related to integrated-circuit devices with priorities dates in 2000 and 2005. It is obviously difﬁcult to establish a direct connection between the co- ownership of these patents and the discovered collusive agreements. Never- theless, the fact that direct product market competitors that have been found to have engaged in collusive behavior share the ownership of patents in the U.S. offers evidence in support of our theory. Moreover, it is important to em- phasize again that our focus on companies that share the ownership of USPTO- EPO equivalents limits our attention to a small subset of co-owned patents and hence implements a much more stringent empirical test than implied by Pre- diction 3. .

4 Conclusion

The main difference between tangible and intangible assets is that the latter are non-rivalrous. This characteristic has received an enormous amount of attention in the literature and in fact is considered the main driver of long-run economic growth (Romer, 1990). We show that this property has important implications when it comes to the decision whether to share the property right that allocates ownership of an intangible asset. Shared ownership of intangible assets is particularly relevant in the context of patents, because patents can be the outcome of research collaboration between different parties, often product market competitors. We show that due to the non-rival character of intangible assets, shared ownership of patent rights creates a connection between the decision to share ownership and the interactions of the co-owners of the patent in both the product and technology markets. Specifically, if co-owners cannot control licensing decisions by the other co-owners, shared ownership of a patent can lead to a tragedy-of-the-commons situation, where co-owners end up over-licensing the patent to everyone’s disadvantage. This occurs because each licensor does not take into account the negative externality that licensing generates on the profits of the co-assignees. This negative externality is greater the closer the co-assignees are in the product space, which implies excessive licensing is more likely when the firms compete in the same market. In contrast, if the legal rules in place allow co-owners to veto each other’s licensing decisions, an anti-commons emerges as any licensing is vetoed.

24 Our analysis shows that this insight has a number of powerful implications for the decision to share ownership of a patent in the first place and the value of patented inventions provided ownership is shared. Our analysis also shows that because joint patents lead to excessive licensing which, in turn, lowers profits in equilibrium, joint patents can help sustain collusion in the product market. Indeed, holding a joint patent lowers the profits that a breaching firm earns in the product market during the punishment phase after collusion has broken down and thus makes a deviation from the collusive agreement more costly. Our findings have important implications for legal rules that govern the sharing of intangible property rights as well as competition policy. The shared ownership of patents is often the outcome of RJVs, which have been shown to increase incentives for collaborative efforts at the R&D stage. Such collaborative research efforts are more likely to result in high-value, breakthrough innovation (Jorde and Teece, 1990). A legal regime that does not limit each co-owner’s ability to license without the consent of the other owners may dis- courage that type of collaborative research. That said, a legal regime that limits each co-owners ability to make unilateral licensing decisions will result in less licensing and hence less technology diffusion. Moreover, our analysis offers an additional angle through which companies that engage in collusive practices through RJVs (Goeree and Helland, 2009) can sustain a collusive agreement. In fact, it is likely that companies rely on the combination of a range of tools – including RJVs and joint patents – to sustain collusive agreements. While RJVs are often not reported to the authorities, the co-ownership of patents can be directly gleaned from publicly available and easily searchable patent databases. This may provide antitrust authorities with a useful additional tool for their investigative work.

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30 A Online Appendix: A Model of Innovation, Joint Patents and Licensing

In this section, we provide a simple model to clarify the assumptions underlying our theoretical arguments in the main text and to verify their robustness. Consider two symmetric incumbent firms, i, j = 1, 2, i = j, that are engaged in a RJV to develop a patentable invention. We take the6 decision to join the RJV as given. Once the innovation has been developed, the firms can exploit it internally by producing the final good and competing in the product market and/or license it out to other companies. We assume that, besides the two incumbent firms, there exist many potential market entrants that have no innovative capability but can produce the good if they receive a license for the use of the innovation from one of the two firms. Thus, firm i can produce the good itself and non-exclusively license out its innovation to potential entrants. The commercial exploitation of the innovation depends on the allocation of intellectual property rights. Firms can opt to share their intellectual property by filing joint patents. If they do, we distinguish between two patent regimes, namely, veto power and no veto power, which correspond to the European and the U.S. legal frameworks, respectively. Instead of filing a joint patent, firms can decide to allocate their intellectual property differently. We assume that the alternative to joint patents is one where only one entity controls the patent rights, while the other firm receives exploitation rights. We assume that the decision about the allocation of patent ownership is concomitant with the formation of the RJV.34 After that, each firm decides simultaneously and independently how much innovative effort to put into the collaboration, that is, companies choose their effort levels, ei, ej. The value of the innovation for firm i is given by α(ei, ej)Vi, where α(ei, ej) stands for the quality of the innovation and increases with the innovative efforts, other things equal, while Vi depends on the commercialization choices and downstream product market competition. Thus, the economic value of an innovation is a function of its intrinsic quality, firms’ exploitation strategies and product market conditions. This simple representation allows us to study firms’ licensing decisions independently of their effort choices. We represent the firms’ actions and decisions in a three-stage game and solve it by backward induction. The timing is as follows:

Stage 1: the ﬁrms, engaged in a RJV, decide how to allocate ownership rights over their innovation;

34Belderbos et al. (2014)’s ﬁndings support this assumption. Through interviews with intellectual property managers of several large organizations engaged in R&D collaboration and co-patenting, they document the importance of ex-ante contractual IP allocation procedures to mitigate knowledge appropriation concerns in ex-post negotiations. i Stage 2: the ﬁrms produce innovative efforts, which affect the quality of the innovation;

Stage 3: the ﬁrms exploit their intellectual property in the product market, which may encompass licensing to third parties.

A.1 Competition and Licensing We abstract from the details of product market competition and assume that the net proﬁts of ﬁrm i from exploiting the patented innovation through a combination of its own production and licensing can be represented as follows:

α(ei, ej)Vi(ki, kj, µ) where ki (kj) represents the licensees of firm i (firm j). For analytical tractabil- ity, we consider ki and kj to be continuous variables. µ (0, 1] captures the degree of product differentiation. For µ = 1 the products∈ are perfect substitutes, and they become more differentiated as µ decreases. We assume that firm i and its licensees sell the same homogenous product, but are differentiated from firm j and its potential licensees.35 Two firms competing at different levels of the value chain or in different industries would display a µ close to zero. These firms would be more likely to license to potential entrants in their segment of the value chain or industry rather than to other firms. In other words, the underlying assumption is that each patent co-owner is more likely to license to potential entrants in her own market niche. This is consistent with the existing empirical evidence that has shown that it is difficult to find licensees in unfamiliar markets (Contractor, 1981) and that downstream production is positively associated with licensing (Marx, Gans and Hsu, 2015).

A.1.1 Joint Patents without Veto Power Consider a regime without veto power and suppose that the firms have chosen to file a joint patent. Each firm solves the following maximization program:

max α(ei, ej)Vi(ki, kj, µ). ki

∂ V With symmetric firms, the first order conditions ∂ Vi 0 and j 0 yield ∂ ki = ∂ kj = N N N the equilibrium number of licenses, ki = kj = k . We make the following assumptions on the profit functions:

35Allowing for both intragroup and intergroup differentiation does not alter our main ﬁnd- ings as long as the former is not greater than the latter.

ii ∂ V (a) j ∂ Vi < 0; ∂ ki = ∂ kj

∂ 2V 2 2 ∂ 2V (b) j ∂ Vi < 0 and ∂ Vi j > 0; ∂ ki ∂ µ = ∂ kj ∂ µ ∂ ki ∂ µ = ∂ kj ∂ µ

2 (c) ∂ Vi > 0. ∂ ki ∂ kj The first assumption simply states that if a licensee of firm j enters the product market, profits of firm i decrease. The second assumption implies that the closer firms i and j (and their licensees) are in the product market, the stronger is the profit reduction due to entry by a licensee of the rival company and the weaker the profit reduction due to entry by a firm’s own licensee. This assumption captures the notion that firm i and its licensees sell the same homogenous product, but are differentiated from firm j and its potential licensees (see also footnote 34). The third assumption makes ki and kj strategic complements. It guarantees that response functions in licensing are positively sloped, which allows for easier comparative statics on the equilibrium number of licensing and guarantees existence of the licensing equilibrium. This holds for instance with a linear demand and Cournot competition. We now compare the jointly optimal with the privately optimal licensing decisions. The jointly optimal licensing decisions are the outcome of the following maximization program:

max α(ei, ej)[Vi(ki, kj, µ) + Vj(ki, kj, µ)]. ki ,kj

∂ V ∂ V Under symmetry, the ﬁrst order conditions ∂ Vi j 0 and j ∂ Vi 0 give ∂ ki + ∂ ki = ∂ kj + ∂ kj = ki∗ = k∗j = k∗. Proposition A-1. Other things equal, joint patents in a regime without veto power lead to over-licensing.

∂ Vj ∂ Vi ∂ Vi ∂ Vj N Given < 0, it is easy to see that N > 0. Thus, k > k . ∂ ki = ∂ kj ∂ ki + ∂ ki ki =ki ∗ The intuition behind this proposition is rather simple:| when each firm decides how much to license it does not internalize the profit erosion it causes on the rival (Arora and Fosfuri, 2003). ∂ 2V 2 Consider now the role of µ. Given that j ∂ Vi < 0 the difference be- ∂ ki ∂ µ = ∂ kj ∂ µ tween the Nash equilibrium number of licenses and the jointly optimal number of licenses is increasing in µ. As we move towards µ = 1, each firm’s licensing decision has a stronger erosion effect on the profits of its rival.

Proposition A-2. Other things equal, joint patents in a regime without veto power lead to more over-licensing the closer the ﬁrms are in the product market.

iii Formally, this can be proven by using assumptions (b) and (c) above. As re- action functions in licensing are positively sloped (assumption (c)), an increase in µ, which makes licensing more attractive (assumption (b)), is associated with a larger number of licenses in the symmetric Nash equilibrium.

A.1.2 Joint Patents with Veto Power Consider a regime with veto power and suppose that the firms have chosen to file a joint patent. Each firm’s licensing decision must be approved by the other ∂ V party. Given our assumption j ∂ Vi < 0, any one-shot licensing decision is ∂ ki = ∂ kj vetoed.36 In short, joint patents in a regime without veto power are not affected by the risk of over-licensing.

Proposition A-3. Other things equal, joint patents are associated with more licensing in a regime with no veto power than in a regime with veto power. This difference is larger, the higher is µ.

A.1.3 Alternative to Joint Patents We consider the case in which one company gets assigned all the patent rights, while its counterpart only obtains exploitation rights. We simplify things further by assuming that the total economic value generated by the innovation (V) is split asymmetrically between the two companies: firm i (that owns the 1 patent rights) gets a share γ, while firm j gets a share (1 γ), with γ > 2 . The standard assumption in the property rights approach is that− the alternative to joint ownership is the allocation of property rights to only one party (Aghion and Tirole, 1994; Rosenkranz and Schmitz, 1999). This would produce a situation in which one firm is a monopolist over the innovation (and can freely decide how much to produce and license), while the other makes zero profits. Using our notation, this would imply that γ = 1.

A.2 Innovative Efforts Consider the second stage of the game where firms choose their innovative efforts. How much effort the firms exert depends on their private payoffs from the innovation. These payoffs, in turn, are a function of the allocation of patent rights: joint patents versus the proposed alternative. We consider first the case

36However, if one assumes efﬁcient bargaining and parties are allowed to negotiate, make side payments or write contracts, licensing occurs as long as it creates additional value.

iv of joint patents (JP). The ﬁrms’ effort levels can be obtained by solving the following program:

max α(ei, ej)Vi(ki, kj, µ) C(ei) ei − where Vi is the value of the innovation for ﬁrm i, which is a function of strategic decisions and actions undertaken in stage 3. Assume further that α(ei, ej) is increasing and concave in the effort levels and that the cost of effort is C(ei) = ei. The ﬁrst order conditions yield:

∂ α eJP , eJP ∂ α eJP , eJP ( i j ) JP JP ( i j ) JP JP Vi(k , k , µ) = 1 and Vj(k , k , µ) = 1 ∂ ei ∂ ej where kJP is the symmetric Nash equilibrium number of licenses from stage 3. We can now examine the innovative efforts in the case companies choose the alternative allocation of patent rights (A). Firms solve the following pro- grams, respectively: max αA(ei, ej)γV C(ei) ei − and max αA(ei, ej)(1 γ)V C(ej). ej − − ∂ α eA,eA ∂ α eA,eA The ﬁrst order conditions yield A( i j ) γV 1 and A( i j ) 1 γ V 1. ∂ ei = ∂ ej ( ) = By comparing the two sets of ﬁrst order conditions three− straightforward considerations emerge. First, the effort levels are symmetric in the case of joint patents, and asymmetric in the case of the alternative allocation of patent rights. Second, in the case of joint patents, effort levels depend on the legal regime, and on the extent of over-licensing (and thus µ). Third, the quality of innovation is a function of the choice of the allocation of patent rights and on how effort levels map into the innovation value.

A.3 Ownership Decision In the ﬁrst stage, ﬁrms decide on the allocation of patent rights, i.e., they choose between joint ownership and the alternative allocation of patent rights. We assume that their choice is driven by total value maximization. Thus, joint ownership is preferred if:

JP JP JP JP JP JP JP JP α(ei , ej )[Vi(k , k , µ) + Vj(k , k , µ)] ei ej A A A A − − αA(ei , ej )V ei ej ≥ − −

v While the actual choice depends on the speciﬁc functional forms and pa- rameterization, we can draw some general conclusions. First, the right-hand side of the inequality is independent of the legal regime for joint patents. Thus, the choice between joint patents and the alternative allocation of patent rights can be analyzed in relative terms across the two regimes. The sum JP JP JP JP Vi(k , k , µ) + Vj(k , k , µ) is higher in the regime with than in the regime without veto power, and the difference increases with µ. The reason is that, in a regime without veto power, ﬁrms over-license which increases product market competition. The latter effect is exacerbated when co-owners are close product market competitors. Summarizing:

Proposition A-4. Other things equal, it is more likely to observe joint patents in a regime with veto power than in a regime without veto power. The difference in probabilities is larger, the higher is µ.

Second, consider the marginal innovation project for which companies in a regime with veto power are indifferent between a joint patent and the alternative allocation of patent rights. If we keep the quality of the joint patent constant and change the legal regime, ﬁrms would choose the alternative allocation of patent rights as the economic value from product market exploitation goes down. Compared with a regime with veto power, in a regime without veto power, joint patents of lower quality are not observed. Firms would always prefer the alternative allocation of patent rights. Only for those projects in which sharing the ownership rights is extremely important for increasing the quality of the innovation (innovative efforts are highly complementary, trust and fairness ensue from joint ownership only, etc), ﬁrms opt for a joint patent.

Proposition A-5. Other things equal, the average joint patent in a regime without veto power has higher scientiﬁc quality (e.g., measured by forward citations) than the average joint patent in a regime with veto power. This difference is larger, the higher is µ.

The intuition behind this proposition is that joint patents in a regime without veto power cause additional problems because they lead to over-licensing. Hence, ﬁrms choose a joint patent only if the beneﬁts (increased innovation efforts) overcome the costs (over-licensing and reduced appropriability of the commercial value).

vi B Online Appendix: A Model of Joint Patents and Collusion

In the model below, we consider only the product market interaction in stage 3. We assume here that the incumbents hold a joint patent over a jointly developed technology. To derive explicit proﬁt functions, we assume that ﬁrms are Cournot competitors in the product market and face a linear market demand function. The goal of this analysis is to show that joint patents in the U.S. may help collusion in the product market.

B.1 Set-up

We consider again two symmetric incumbent firms i = 1, 2. The firms play an infinitely repeated game, where, in each period, they can choose to collude or to compete. Future profits are discounted by a common discount factor δ [0, 1]. We compare the incumbents’ decisions to collude under the veto power∈ and the no veto power legislation. In each period, if the incumbents collude, they make a collusive profit V c. If they compete, per-period profits are V n. In case one incumbent unilaterally deviates from the collusive agreement while the other sticks to it, the deviating firm earns the best-response profit V d . The incumbents use (grim) trigger strategies: if one incumbent defects, the other reverts to competition in the period following the defection and forever after. As before, the incumbents can both use the technology themselves to produce the final good and non-exclusively license it out to potential entrants. We again assume that there exist many potential market entrants that have no innovative capability but can produce the good if they receive a license for the use of the technology from one of the incumbents. Let ki 0 again be the number of licenses sold by incumbent i = 1, 2 and a continuous≥ variable. The total number of product market competitors is then k1 +k2 +2. An incumbent makes a take-it-or-leave-it offer to a potential entrant and extracts all the net surplus generated by the use of the technology through an upfront fixed fee. In particular, we do not consider contracts with per-unit royalties.37 We also assume that licensing does not involve any transaction costs.38 37If incumbents did not extract the entire surplus from the licensees, their licensing activity would be lower in equilibrium. While this would decrease the difference between the veto power and no veto power regimes and thus weaken our main mechanism. 38Transaction costs do not qualitatively affect our results as long as they are sufficiently small.

vii Each incumbent faces the following market demand: X X pi(qi, qj) = a qi µ qj, − ki +1 − kj +1 where pi and qi denote the price and the quantity respectively and a > 0 is the demand intercept. The parameter µ (0, 1] again captures the degree of product differentiation. For µ = 1 the products∈ are perfect substitutes, and they become more differentiated as µ decreases.39 The first summation is across quantities supplied by all the firms producing variety i, that is, the licensor and its licensees, and the second summation is across quantities supplied by all the firms producing variety j = i. Implicit in the above demand function is the absence of intragroup differentiation:6 the licensees produce exactly the same variety as the licensor. See discussion about this assumption in footnote 34. Note that for ki = kj = 0, the market is a linear Cournot duopoly.

B.2 Timing Each period is divided into the following stages:

• Collusion decision – Each incumbent decides whether to enter a collusive agreement. If at least one incumbent decides not to collude, competition takes place.

• Deviation decision – Each incumbent decides whether to stick to, or deviate from, the collusive agreement. Its rival does not observe this decision until the output decision (last stage) is taken.

• Licensing decision – Each incumbent decides how many potential entrants she wishes to license the technology to.

• Product market interaction – All the ﬁrms that have acquired the technology, either through innovation or a license, produce the good. Proﬁts are realized.

Notice that the presence or absence of veto power inﬂuences the incumbents’ licensing decision and thereby the product market interaction.

39 For µ = 0 the incumbents act like two monopolists in two separate markets, and collusion is not an issue.

viii B.3 Collusive Incentives and Joint Patents B.3.1 No Veto Power Consider a regime without veto power and suppose that the incumbents decide to collude by implementing the joint profit maximizing outcome in the product market. Joint profit maximization cannot involve any licensing due to the efficiency effect which captures the negative relationship between ag- gregate industry profits and the number of producers (Tirole, 1988). Each incumbent’s per-period profit from collusion is

2 c a V = . 4 (1 + µ) In the absence of veto power a unilateral deviation from collusion could potentially involve licensing. However, it can be proved that the optimal unilateral deviation is to just produce the best response quantity in the product market which yields higher proﬁts than both deviating from the collusive agreement in licensing and production and in licensing only. A deviator thus earns a per-period proﬁt equal to

2 d (2a + µa) V = 2 . 16 (1 + µ) A deviation is followed by a punishment phase which consists of the reversion to competition forever. Hence, suppose that the product market is competitive. Each product market competitor producing variety i offers the equilibrium quantity a 2 + kj µ(kj + 1) q k , k . i( i j) = − 2 (ki + 2)(kj + 2) µ (ki + 1)(kj + 1) − 2 The product market profit of each firm producing variety i is πi(ki, kj) = qi . Each incumbent’s total per-period competitive profit can then be expressed as Vi(ki, kj) = (ki +1)πi. Each incumbent i chooses ki to maximize its total profit, and the first-order condition40 is

∂ πi(ki, kj) πi(ki, kj) + (ki + 1) = 0. ∂ ki Intuitively, licensing has two opposing effects on the total proﬁts of an incumbent. First, by selling an additional license, the incumbent captures more market share. The rents earned by the licensee fully accrue to the incumbent in the

40 2 2 It is possible to show that ∂ Vi(ki, kj)/∂ ki < 0.

ix form of licensing payments πi(ki, kj) > 0. Second, licensing intensifies competition, and the incumbent experiences erosion of profits in her own business, that is, ∂ πi(ki, kj)/∂ ki < 0 due to an additional competitor in the product market. These losses are, however, shared with the other incumbent such that the licensor does not fully internalize the reduction in industry profits. The relative strength of these two effects crucially depends on the degree of product differentiation. If the incumbents are close competitors producing fairly homogenous goods, the profit erosion felt by one incumbent due to an additional license sold by the other incumbent is strong. Imposing symmetry n (ki = kj = k ) and solving the first-order condition for the equilibrium number of licenses kn yields n 1 k = p 1. 1 µ2 − − The incumbents sell a positive number of licenses which increases with the n n substitutability of the products. As ∂ V (k )/∂ k < 0, however, the competitive profit is decreasing in the number of licenses and, thus, the incumbents would benefit from jointly restricting their licensing activity. Each incumbent’s per- period equilibrium profit as a function of µ is

2p 2 n a 1 µ V = −p . 2 (1 + µ) 1 + 1 µ2 − Collusion is a subgame-perfect equilibrium if and only if the following incentive constraint holds for each incumbent:

1 c d δ n V V + V . 1 δ ≥ 1 δ − − We rewrite this constraint as

2 p µ 1 + 1 µ2 δ δe(µ) p − p . ≥ ≡ 4 (1 + µ) 1 1 µ2 + µ2 1 + 1 µ2 − − − The stability threshold δe(µ) is decreasing in µ. Intuitively, the more homogenous the products, the larger the equilibrium number of licenses sold and the tougher is quantity competition in the static equilibrium. Thus, higher substitutability of products makes the retaliation following a deviation harsher. This harsher punishment as well as lower profits from a deviation due to less differentiation facilitate collusion. At the same time, however, also the collusive profits decrease which makes collusion harder. In the absence of veto power the first two effects outweigh the third one, and collusion becomes easier when products become more substitutable. The dampening effect of licensing on the

x competitive profits suggests that, in the absence of veto power, competing incumbents should have little incentives to file joint patents. Moreover, these incentives should, if anything, decrease even more when the substitutability of products increases. If, however, joint patents are collusive, incumbents find them even more attractive when they are closer in the product market.

B.3.2 Veto Power Consider now a regime with veto power where each incumbent can block the licensing decision of its competitor. As in the absence of veto power neither collusion nor deviation involves any licensing, the same applies under a regime with veto power. The only instance where veto power influences the licensing decisions of the incumbents is in the competitive equilibrium where incumbents would sell a positive number of licenses in the absence of veto power. Each incumbent vetoes the rival’s decision to license the jointly patented technology if the rival’s licensing negatively affects her product market profit. As ∂ Vi(ki, kj)/∂ kj < 0, each individual decision to license is vetoed by the co- assignee and, the incumbents do not sell any licenses in equilibrium. The per- period profits are thus equal to

2 n a Vv = 2 . (2 + µ) Collusion is a subgame-perfect equilibrium if and only if the following incentive constraint holds for each incumbent:

2 µ 2 δ δ µ ( + ) . ev( ) 2 ≥ ≡ 8 + 8µ + µ

The stability threshold δev(µ) is increasing and convex in µ. Intuitively, less differentiation lowers all profits, but the negative effect on the collusive profits now outweighs the negative effects on the profits from competition and defection. Hence, as µ increases, collusion becomes more difficult. Given that δev(µ) > δe(µ) for any µ (0, 1] and δev(µ) is increasing in µ while δe(µ) is decreasing in µ, we can conclude∈ that:

Proposition A-6. Other things equal, joint patents can sustain collusion for a larger set of discount factors in a regime without veto power than in a regime with veto power. This difference is larger, the higher is µ.

xi C Online Appendix: Data

To validate our theoretical predictions empirically, we use data on patent ﬁlings with the EPO and the USPTO. We also rely on data on discovered collusive agreements.

C.1 Patent-level Analysis We use all patent filings at the USPTO and the EPO with a priority date between 1990 and 2010.41 The data come from the EPO Worldwide Patent Statistical Database (PATSTAT).42 In total, we have almost 2 and 4.8 million filings at the EPO and the USPTO, respectively. At each office, we split filings into jointly owned and single-owned patents. A jointly owned patent is defined as assigned to two or more corporate assignees. That is, we remove all filings that are co-assigned to, for example, corporate assignees and individuals or non-profit research institutions from the set of jointly owned patents. This was done using a cleaning algorithm as well as extensive manual checking and cleaning.43 We also take account of companies’ ownership structure to ensure patents owned by companies within the same business group are not considered as patents co-owned by product market competitors.44 In a next step, we identify those EPO and USPTO patents that are equivalents,45 which means that the EPO and USPTO patents protect the same invention.46 Our analysis focuses on this set of

41The priority date of a patent indicates the first filing date of a patent. Priority and filing dates may not coincide, for example, in the case of USPTO and EPO equivalents if one equivalent is filed after the other. Both have the same priority date, but the patent that was filed later has a different filing date. 42We use the PATSTAT version October 2011. 43We checked all jointly owned patents manually to ensure that we only include patents co-assigned to corporate owners. 44For this purpose, we use the information on business groups available in firm-level data. For U.S. assignees, we use Compustat data in combination with information from Dlugosz et al. (2004) to allocate firms into business groups. Further, we also rely on the dynamic patent assignment information provided by the NBER Patent data project (Hall et al., 2001; Cockburn et al., 2009) to distinguish patents jointly held within business groups from patents jointly held by legally independent companies. For firms registered in Europe, we use Bureau van Dijk’s Amadeus database. We use the ownership information available in Amadeus to allocate firms into business groups. For this purpose we track changes in firms’ ownership structure over time by using a different Amadeus version for each year covered by our sample. 45Equivalents are patents that share the same priority filings. They are defined according to the INPADOC definition (see Martinez (2010) for more information). 46Patents are territorial rights, that is, if a company wants to obtain patent protection on its invention in the U.S. and Europe, it has to apply at both the USPTO and the EPO. In Europe the company also has the alternative to file directly with a national patent office, although in practice a company that takes out a patent in both the U.S. and Europe will not limit itself to a

xii patents – patents that protect the same invention in both the U.S. and Europe. To compute a product market proximity measure between co-assignees, we rely on a mapping of patents’ IPC classes47 into the International Standard Industrial Classiﬁcation (ISIC) by Lybbert and Zolas (2014).

C.2 Discovered Collusive Agreements We obtained data on collusive agreements that have been detected by antitrust authorities from the Private International Cartels (PIC) Data Set maintained by John M. Connor.48 PIC contains the universe of so-called private, international, “hard-core” cartels since 1990 (a total of nearly 935 cartels), where the PIC data manual deﬁnes “hard-core” cartels as “agreements (contracts, deals, coordinated bidding, etc.) to control market prices or restrict industry supply (or both).” The data focuses on collusive agreements in which companies from different jurisdictions are involved. We match the information on companies involved in the collusive agreements to our patent data. Apart from the iden- tity of companies involved in a collusive agreement, the dataset also contains information on the market and geographical scope of the agreement as well as some data on the importance of the agreements (as measured by affected sales and the monetary penalty imposed by the authorities). We also have the start and end dates of the collusive agreements.

single national office. This means that the company will file through the EPO which offers the possibility to obtain patent protection in all member states of the European Patent Convention through a single filing. 47The International Patent Classification (IPC) is a hierarchical system of symbols for the classification of patents according to different technology areas. 48We thank John Connor for generously making the data available for our research.

xiii D Online Appendix: Tables

Table A-1: Differences in joint ownership – U.S. vs Europe by manufacturing industry

Chemicals and Pharmaceuticsl (ISIC 20 and 21) USPTO Joint Single Total `` `` `` Joint `` 81.52% `` 72.78% `` 72.78% 74.00% ``` 26.00% ``` 4,323 ``` ` ``` 18.48%

EPO Single 72.78% ``` `` Total `` 4,762 72.78% ```

Computer, electronic and optical products (ISIC 26) USPTO Joint Single Total `` `` `` Joint `` 79.38% `` 72.78% `` 72.78% 69.72% ``` 30.28% ``` 1,256 ``` ` ``` 20.62%

EPO Single 72.78% ``` `` Total `` 1,430 72.78% ```

Machinery and equipment n.e.c. (ISIC 28) USPTO Joint Single Total `` `` `` Joint `` 86.00% `` 72.78% `` 72.78% 74.84% ``` 25.16% ``` 3,365 ``` ` ``` 14.00%

EPO Single 72.78% ``` `` Total `` 3,867 72.78% ```

Notes: The table cross-tabulates the ownership pattern of patents that have been ﬁled at both the EPO and the USPTO. It shows the percentage of patents that are co-owned at both the EPO as well as at the USPTO relative to the total of jointly owned patents with a U.S. and EPO equivalent. Patents have been assigned to 2-digit ISIC industries by mapping a patent’s IPC codes to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014).

xiv Table A-2: Patent co-ownership and discovered cartels

Dependent variable: US: co-owned US: co-owned US: single owned co-ownership type EP: single owned EP: co-owned EP: co-owned

(I) (II) (III) (IV) (V) (VI) (VII) VIII) (IX)

product market Proximity† 0.352** 0.352* 0.336** -0.196 -0.191 -0.134 -0.022 -0.020 -0.030 (0.164) (0.183) (0.166) (0.175) (0.174) (0.182) (0.056) (0.055) (0.074) Number of cartel participants‡ 0.0001 0.003** 0.0007 (0.0003) (0.001) (0.0005) Industry concentration§ -1.839 3.100 -3.545* (1.679) (3.183) (1.854) Cartel Industry Dummies YES YES NO YES YES NO YES YES NO # Obs. 3,216 3,512 3,428 3,512 3,168 3,512 Notes: † Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefficient of the resulting vectors of 2-digit ISIC codes for firms i and j. ‡ Number of companies participating in a detected cartel. § Computed as Herfindahl Index based on employment data reported by all firms in the entire Compustat dataset; industries defined at cartel-level. Logit estimates. Marginal effects reported. The sample consists of USPTO-EPO equivalents where at least in one jurisdiction the patent is co- owned. Robust standard errors clustered at the firm-pair-level – standard errors reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01.

xv Table A-3: Top 20 company-pairs: discovered cartels and product market proximity (conditional on patent co- ownership)

Rank Company 1 Company 2 Industry of cartel Market of cartel

1 Deutsche Telekom France Telecom Communication service Mobile phone roaming fees; mobile phone operations 2 Panasonic Samsung Electronic devices, incl. computers LCDs; cathode ray tubes; optical disk drives; battery cells 3 NEC Samsung Electronic devices, incl. computers SRAMs; LCDs; optical disk drives 4 NEC Panasonic Electronic devices, incl. computers LCDs; optical disk drives 5 Daimler Volkswagen Wholesale, retail Auto imports 6 Matsushita Samsung Electronic devices, incl. computers Cathode ray tubes 7 BMW Volkswagen Wholesale, retail Auto imports 8 Honda Toyota Wholesale, retail Automobiles 9 Phillips Electronics Panasonic Electronic devices, incl. computers LCDs; cathode ray tubes; optical disk drives; battery cells xvi 10 Sharp Samsung Electronic devices, incl. computers LCDs; cathode ray tubes; optical disk drives 11 Phillips Electronics STMicroelectronics Electronic devices, incl. computers Memory chips for smart cards 12 Hyundai Kia Motors Machinery, incl. electrical and parts Auto manufacturing 13 Wacker Chemie Degussa Rubber and plastic PVC (polyvinyl-chloride) plastic 14 Phillips Electronics Sharp Electronic devices, incl. computers LCDs; cathode ray tubes; optical disk drives 15 BMW Daimler Wholesale, retail Automobiles 16 Matsushita Phillips Electronics Electronic devices, incl. computers LCDs; cathode ray tubes 17 NXP STMicroelectronics Electronic devices, incl. computers Memory chips for smart cards 18 Phillips Electronics Sony Electronic devices, incl. computers; Instruments DVD technology; recorded music; optical disk drives 19 Sharp NEC Electronic devices, incl. computers LCDs; optical disk drives 20 Sony Panasonic Electronic devices, incl. computers Optical disk drives; battery cells

Notes: Shows top 20 company-pairs in terms of product market proximity which have been found to collude by antitrust authorities. The sample consists of companies that have at least one USPTO-EPO equivalent where at least in one jurisdiction the patent is co-owned. Product market proximity is obtained from mapping IPC codes of the entire patent portfolios (for 1990-2010) of companies i and j to ISIC codes using the IPC-ISIC correspondence by Lybbert and Zolas (2014). Our measure of product market proximity is the correlation coefﬁcient of the resulting vectors of 2-digit ISIC codes for ﬁrms i and j.