Moving beyond simple examples: Assessing the incremental value rule within standards

•We assess a policy proposal for incremental value pricing to define FRAND licensing.•We develop a model of patent licensing where technologies have multiple dimensions.•Multiple dimensions is realistic because many technologies involve trade-offs.•Firms cater their products to users who have different views on these trade-offs.•An incremental value rule discriminate against competition inducing technologies.

This paper presents a model of patent licensing in a standard setting context when patented technologies are heterogeneous in multiple dimensions. The model allows us to assess a policy proposal put forth in the literature: that an incremental value pricing rule should define Fair, Reasonable, and Non-Discriminatory (FRAND) patent licensing within Standard Setting Organizations as it replicates the ex ante efficient competition outcome. We find that when patented technologies must be weighed on numerous factors, and not simply one-dimensional cost-savings, there is unlikely to be a single incremental value that can be agreed upon by all relevant parties. Furthermore, ex ante competition fails to select the efficient technologies by penalizing the more versatile ones. These results cast some doubt on the usefulness of the incremental value as a precise benchmark for FRAND.