Complementary patents and market structure

Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to nonintegration. Horizontal integration of IP holders (patent pool, pass through) solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, whereas a horizontally integrated firm always benefits from entry and innovation.