Price Commitments in Standard Setting under Asymmetric Information

Many observers have voiced concerns that standards create essentiality and thus monopoly power for the holders of standard essential patents (SEPs). To address these concerns, the academic literature advocates structured price commitments, whereby SEP holders commit to the maximum royalty they would charge were their technology included in the standard. We consider a setting in which a technology implementer holds private information. In this setting, price commitments increase efficiency not only by curbing SEP holders' market power, but also by alleviating distortions in the design of the royalty scheme. In the absence of price commitments, the SEP holder distorts the implementer's output downward to reduce information rents. Price commitments reduce this distortion. We derive conditions under which price commitments can be implemented using a simple royalty cap as used in practice.