Tariff Discrimination, Grant-Back Licensing And Downstream Corporate R&D Innovation

March 2,2015, China’s National Development and Reform Commission (NDRC) notified the administrative penalties on monopolization of Qualcomm Inc. The notification pointed out that Qualcomm Inc. carried activities against antitrust laws on manufacturers of wireless terminals using its dominant position in the licensing market of wireless communications Standard Essential Patents (SEPs) and the baseband chips market. These activities include excessive pricing on patent licensing fee by the overall price, tie-in sale of non-SEPs without proper reasons, additional grant-back licensing conditions in baseband chips sales and other behaviors which abuse market dominant position. Accordingly, China’s enforcement agencies of anti-trust law imposed an administrative fine of 6.088 billion yuan to Qualcomm Inc., and ordered it to make a rectification on its monopolization. This case is an intellectual property antitrust case of great significance with the most intensive punishment after the case of Huawei versus IDC. And the notification changes the charging standard of Qualcomm Inc. and cancels grant-back licensing conditions for the first time, which plays an important exemplary role as a legal precedent and requires deeper research on it.There still exist controversies on economic explanations for some key issues of the case, which can be summed up in three dimensions as following. Firstly, what’s the intention of tariff discrimination and grant-back licensing of Qualcomm Inc.? Profits, monopoly power or consideration for efficiency? Secondly, how does the discriminatory charging standard depending on the overall price influence the innovation incentive of wireless terminal manufacturers? Thirdly, the mandatory grant-back licensing condition presented by Qualcomm Inc. while licensing wireless SEPs violates antitrust laws. How does it influence innovation of downstream enterprises?In the field of technology licensing, existing literatures study elements which impact the optimal choice of technology licensing contracts based on market structures of production competition, price competition and mixed competition. The elements include nature of innovative technology, intensity of innovation, consumers’heterogeneity, endogenous location order and asymmetric information. When it comes to the patent economics, most of economists pay attention to appropriate patent fee which meets Fair, Reasonable, and Non-discriminatory (FRAND) terms with methods like Ex-Ante Auction Model and Shapley’s value. But existing models fail to reflect basic economic features of this case, including vertical differentiation, tariff discrimination, grant-back licensing and so on.This essay plans to build demand functions including vertical differentiation with the case of Qualcomm Inc. Then the author analyzes influence of tariff discrimination and grant-back licensing conditions of upstream patent-licensing monopolist on innovation incentive of downstream mobile phone manufacturers, with the case of Qualcomm Inc. At last, this paper discusses reasonable antitrust and regulatory polies combining the antitrust law enforcement practice in China.This paper is divided into five parts, including introduction to research background and significance, brief introduction to the case of Qualcomm Inc., literature review, construction and solving of mathematical model, antitrust analysis on tariff discrimination in technology licensing. The third and fourth part are the core sections of this paper.According to the author’s study, under the demand functions including vertical differentiation, the optimal contract of technology licensing depends on degree of innovation and difference in product quality. Tariff discrimination reduces the innovation incentive for companies to carry on research and development (R&D), while doing harm to consumer surplus and total profits of companies. In the presence of grant-back licensing, the author parameterizes rivals’ degree of technology transformation and gets profits of downstream mobile phones manufacturers and innovation incentive of companies under the jointed influence of product quality difference and degree of technology transformation. Beyond people’s thoughts, the proposition, profits of companies who get technologies for free increase in degree of technology transformation, is true only in a strict range of parameters. Moreover, the author concludes that charging standard of upstream companies licensing wireless SEPs may change over degree of technology transformation. Therefore, this paper discusses the antitrust policies based on the analysis results.There still exist some drawbacks in this paper. Firstly, the model assumes that companies charge patent licensing fee in the style of franchise, while Qualcomm Inc. charges by the overall price in the real situation. Despite this difference, the author concludes that there exists no equilibrium in the game of charging by overall price. Being limited by the ability of the author, researchers can execute deeper research. Secondly, production cost per unit of downstream mobile phone manufacturers still needs to be introduced into the model. Researchers can do further analysis on the influence of cost difference on charging standard or innovation incentive in the presence of grant-back licensing. Thirdly, this paper fails to deduce the proper patent licensing fee, which is also the direction of the jointed effects of China as for the whole world.