Don’t fence me in: Fragmented markets for technology and the patent acquisition strategies of firms

1. Don’t fence me in: Fragmented markets for technology and the patent acquisition strategies of firms Ziedonis, Rosemarie H. Management Science, 50 (6): 804-820 Presented by Jiyoon Chung

2. Overview • Introduction • Theory development and hypotheses • Hold-up in markets for technology • Implications for patent acquisition strategies • Constructing a citations-based measure of fragmented markets for technology • Methodology • Sample selection and data • Model specification and variables • Results • Conclusions • Discussion

3. Introduction • This paper examines the conditions under which an aggressive patent strategy is an alternative mechanism that firms use to avoid being “fenced in” by owners of technologies used in the design and manufacture of their products. • Transaction cost theory, studies of intellectual property (IP), and its exchange • Primary reasons firms patent in complex industries: • Patent blocking • To use in negotiations with owners of outside patents and technologies • To deter patent infringement lawsuits

4. Theory development and hypotheses • Two dimensions of a firm’s contracting problem • Hold-up in markets for technology • The additional problems posed by multiple, fragmentary patent owners • Hold-up in markets for technology • Internalize transactions • Underinvest in areas where risks of expropriation are high • Important insight from “anti-commons” theory: a firm’s bargaining challenge is affected by the level of dispersion among rights holders

5. Theory development and hypotheses • Implications for patent acquisition strategies • To acquire the owners of patents • To amass larger patent portfolios as a way of improving ex post bargaining position • Hypothesis 1: The more fragmented the external technology markets, the more aggressively firms will patent (beyond what is otherwise predicted). • Hypothesis 2: The effect of fragmented external rights on incentives to patent will be more pronounced among capital-intensive firms (all else equal). • Hypothesis 3A: The effect of fragmented external rights on incentives to patent will be stronger following the “pro-patent” shift in the U.S. legal environment (all else equal). Hypothesis 3B: The interaction effect between fragmented rights and capital-intensity will be greater in magnitude following the “pro-patent” shift in the U.S. legal environment (all else equal).

6. Constructing a citations-based measure of fragmented markets for technology

7. Methodology • The estimation sample is based on observations during the 1980-1994 period, generating 667 observations on 67 firms • Model specification: • Control variables: the size of the firm, R&D spending, capital-intensity, a dummy variable for Texas Instrument (TI), annual time dummies, fragmentation index, and interaction term

8. Results

9. Results

10. Results • Hypothesis 1 and 2 are corroborated

11. Results • Hypothesis 3A and 3B are corroborated

12. Research limitations • Focuses on one mechanism (patenting) in isolation from others • Are the research findings generalizable to other technological or industrial settings?

13. Conclusions • This paper examines how the allocation of property rights among inventive actors shape the patent acquisition strategies of firms • Findings: • Firms acquire patents more aggressively than otherwise predicted when markets for technological inputs are highly fragmented • This effect is more pronounced among firms with large investments in technology-specific assets and under a legal regime of strengthened exclusionary rights for patent owners • Capital-intensive firms do not patent more intensively unless they build on fragmented pools of outside technologies