Research into royalty stacking models shows holdup theory exaggerates royalties by twenty times

According to patent-holdup theory, excessive patent royalties cause slow rates of innovation. As an empirical matter, the aggregate royalties paid by licensees in any industry can be estimated on the basis of the SEC 10-K and 40-F filings of the patent-licensing firms.21 The data on the canonical case of mobile phones shows that the cumulative royalty yield from the twenty-one largest patent licensors in the mobile phone value chain was only 3.3 percent of a mobile phone's average sales price in 2015. That ratio has been fairly stable since at least far back as 2007.22 Researchers have parameterized royalty-stacking models from the patent-holdup literature using actual price and quantity data, and have discovered that the royalty yield predicted by the models is more than twenty times higher than the actual royalty yield and about four-fifths of the price of a smartphone. They have also found that no individual patent licensor earns an individual royalty consistent with the hypothesis that it operated as a monopolist.23

The facts of fast and continuous innovation in the mobile phone industry—one of the stelae of patent-holdup theory—are evident to anyone with a smartphone in their pocket. Three decades ago, a mobile phone cost the current equivalent of $10,000, was the size of a brick, weighed a kilo, and enabled its user to make a half-hour call before going dead. Today, a smartphone has more computational power than the supercomputers that guided the Apollo missions to the moon, allows a user to produce and share data, video, and audio files with anyone on the planet, costs an average of $300—and also happens to make a phone call.