Harvard Business School professor Josh Lerner has been collaborating with Professor Jean Tirole of Toulouse University for over 15 years; their research focuses on the economics of knowledge sharing and knowledge sharing organizations. Professor Lerner graciously shared insights from his work with Professor Tirole, this year’s Nobel Prize winner in Economic Sciences.
Knowledge Sharing
Professor Lerner:
The bulk of the work we’ve done has been on knowledge sharing and knowledge sharing organizations. In the spectrum by which companies share their intellectual property, one extreme form is open source. With open source, you’re giving your intellectual property away, allowing for it to be freely distributed. On the other side of the spectrum is standard-setting patents (SEPs). In this more modified version of knowledge sharing, a company continues to own their intellectual property, but they enter into fair, reasonable, and nondiscriminatory (FRAND) licensing terms in order to share their knowledge with the world.
Open source software is typically developed as a public collaboration; it involves developers at many different locations and organization sharing code to develop and refine programs; and the resulting open source software is made freely available.
Professors Lerner and Tirole explored the economics of open source software in “Some Simple Economics of Open Source” (Journal of Industrial Economics, Vol. 50, No. 2, pp. 197-234, June 2002). In this article, the authors examine cooperative software development from the early 1960s to present day; provide case studies on four open-source programs: Apache, Linux, Perl, and Sendmail; and question why thousands of top-notch programmers would contribute freely to the provision of a public good. On this latter point, the authors identify the value of recognizing and rewarding a contributor’s work as a key motivator within the open source process.
In “The Dynamics of Open Source Contributors” (American Economic Review, Vol. 96, No. 2, pp. 114–118, 2006), Professor Lerner, Professor Tirole, and their co-author Professor Parag Pathak, delve into the motivations of programmers and organizations that contribute to open source projects. As stated above, participants benefit with an opportunity to enhance their reputation among their developer peers. The authors found additional benefits to programmers include: an opportunity to improve their ‘development’ performance; the intrinsic pleasure from a “cool” open source project can be fun; and, in the long run open-source contributions may lead to future job offers. From a corporate perspective, the authors learned there are varied reasons commercial companies may choose to become involved in the open-source community. These include: leveraging their expertise in a proprietary segment of the market that is complementary to the open-source program; in the case that a company’s product directly competes with an open-source product, they may encourage their programmers to participate in open-source projects to learn about the product’s strengths and weaknesses; in order to learn about potential employees when their staff interacts with open-source programmers; and, because it generates good public relations with programmers and customers.
Additional work from Professor Lerner and Professor Tirole on open-source topics include:
Standard-essential patents (SEPs) are identified when a patented technology is determined to be an essential aspect of a technology standard. For example, wireless-technology standards allow interoperability across different platforms and devices; that is, the standards enable easy connections to the internet from smartphones and laptops at home, the library, and a local coffee shop – all regardless of the manufacturer of the device and wireless router that is making the connections. Standard setting organizations (SSOs) exist as one way for industry participants to agree on which products and processes will become standardized; and within SSOs, licensing terms are established so that innovators utilizing SEPs will be able to do so on fair, reasonable, and non-discriminatory (FRAND) terms.
Professor Lerner and Professor Tirole build a framework for the analysis of SEPs in their paper, “Standard-Essential Patents” (forthcoming in the Journal of Political Economy). By being included into a standard within an SSO, a patent can become more important as a standard-essential patent than it would have if it were not included in the standard. Despite commitments made by patent owners to grant licenses on reasonable terms prior to the establishment of the standard, once their intellectual property becomes standard-essential, the ambiguity of the “fair, reasonable, and non-discriminatory” commitments have led to intense litigation activity. In their paper, the authors identify several types of inefficiencies attached to the lack of price commitment; show how structured price commitments restore competition; and, analyze whether price commitments are likely to emerge in the marketplace.
Professor Lerner, Professor Tirole, and their colleague Benjamin Chiang investigate the relationship between standard-setting organizations’ characteristics and their policies governing the licensing of patents in “The Rules of Standard Setting Organizations: An Empirical Analysis” (Rand Journal of Economics, Vol. 38, No. 4, Winter 2007, pp. 905-930. Earlier version distributed as National Bureau of Economic Research Working Paper No. 11156). In this paper, the authors found a negative relationship between the extent to which an SSO is oriented to technology sponsors and the concession level required of sponsors, and a positive correlation between the sponsor-friendliness of the selected SSO and the quality of the standard.
Additional work from Professor Lerner and Professor Tirole on standard-essential patents, standard-setting organizations, and patent pools include:
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“A Better Route to Tech Standards” (Science, Vol. 343, No. 6174, February 28, 2014, pp. 972- 973)
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“The Design of Patent Pools: The Determinants of Licensing Rules” with Marcin Strojwas (Rand Journal of Economics, Vol. 38, No. 3, Fall 2007, pp. 610-625. Earlier version distributed as National Bureau of Economic Research Working Paper No. 9680.)
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“Efficient Patent Pools” (American Economic Review, Vol. 94, No. 3, June 2004, pp. 691-711. Earlier version distributed as National Bureau of Economic Research Working Paper No. 9175.)
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“Cooperative Marketing Agreements between Competitors: Evidence from Patent Pools” with Marcin Strojwas (NBER Working Paper No. w9680, May 2003)
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“A Model of Forum Shopping, with Special Reference to Standard Setting Organizations” (NBER Working Paper No. w10664, August 2004)
Professor Lerner pointed out that his work with Professor Tirole is all variances on the same notion: “you can gain by sharing your intellectual property.”
Interesting Findings
Professor Lerner shared a few of the interesting discoveries he and Professor Tirole have encountered regarding the motivations of individuals and companies that chose to share their expertise through open source projects, patent pools, and standard-setting organizations.
In open source projects, developers create software code that others may use freely. What makes someone share their expertise in this way?
Professor Lerner:
When you look at a lot of the rhetoric in open source community, you hear that people participate in creating open source projects because it is for the public good, the good of humanity and so forth. This may seem puzzling at first because who ends up using open source? Companies such as IBM, Microsoft, Google. Normally, if people feel like donating their time and expertise, you wouldn’t expect to see large corporations on the list of recipients.
We tried to solve that paradox. Despite the fact that people are not getting paid for their open source contribution, it could still be economically beneficial to take part in these projects. It is essentially a way to communicate to the world their ability. ‘By volunteering my time, I’m going to get established, get visibility in a way that can translate into all sorts of projects: starting my own start up, getting opportunities for future employment, and opportunities to work with people I admire.’
Knowledge-sharing organizations, such as patent pools, present a distinct set of reasons for sharing intellectual property. Patent pools can be defined as formal or informal organizations where for-profit firms share patent rights with each other and third parties. Professor Lerner explained that patent pools can be beneficial to society.
When a new technology standard is being adopted, companies working with the new standard can become anxious because they have to license all the intellectual property for the new standard in order to incorporate it into their product. If there is a patent pool that will license the technology aligned with the new standard, this greatly reduces people’s anxiety to adopt the new standard.
Yet there is a challenge with patent pools. Professor Lerner pointed out that some people use patent pools as way to jack up the licensing rates they can charge for their intellectual property (IP).
It is hard for policymakers to determine which patent pool participants are good and could benefit society by helping new technologies get established and which patent pools are created for colluding on price increases. What we have found is that firms that participate in patent pools that also require the participants to license patents they own can lead to situations where you only get the good-for-society pools.
Impact on Policy
Policymakers and courts have looked to Professor Lerner and Professor Tirole’s work for guidance on how to approach setting parameters with patents and standards.
Professor Lerner:
An example is with the European Commission and their guidelines around treating intellectual property. A number of the ideas we’ve explored have found their way into the European Commission’s rules and practices in terms of how they evaluate patent pools applications and the like.
Recent work on standard-essential patents are newer; but there is a lot of interest from policy makers and courts in finding guidance on how to approach standards. There are huge fights among standards, especially with new smartphone technologies, and people have been hungry for a way to address the ambiguity of the FRAND concept.
For more information on the litigation challenges with patents and FRAND licensing, read “A Way To Mitigate Smartphone Patent Litigation.” This Forbes article discusses Professor Lerner and Professor Tirole’s ideas to prevent future patent-related litigation.
Collaboration
Professor Lerner and Professor Tirole have been co-authoring papers for over 15 years. Professor Lerner shares their collaboration method:
Typically we take turns taking the lead on a paper. If it’s a theoretical paper, Jean takes the lead; for empirical papers, I take the lead. We work together, collaborating. Jean comes to MIT twice a year and we’ll get together during those times; and I will sometimes go to Toulouse and camp out to work on a paper.
On a Personal Note
Professor Lerner shared what he appreciates about Professor Tirole.
Jean is a fantastic guy in the sense that he’s a creative and innovative economist. The Nobel citation did great job of capturing his contributions. Another aspect of him is that Jean is a real institution builder. He put a huge effort into developing the Toulouse School of Economics; he has been a true entrepreneur in terms of developing, getting funding, and providing the vision for the school. If you look at Europe, in terms of studying economic issues, the school has been very entrepreneurial.
Jean is a fabulous, nice guy. It is fair to say, when you look at successful economists, it’s not always the case that the most brilliant minds are also friendly people! Jean is truly a wonderful, nice person.
Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, and head of the Entrepreneurial Management unit. Much of his research focuses on venture capital and private equity organizations. (This research is collected in three books, The Venture Capital Cycle, The Money of Invention, and Boulevard of Broken Dreams.) He also examines policies on innovation and how they impact firm strategies. (That research is discussed in the books Innovation and Its Discontents, The Comingled Code, and the Architecture of Innovation.)
Professor Lerner co-directs the National Bureau of Economic Research’s Productivity, Innovation, and Entrepreneurship Program and serves as co-editor of their publication, Innovation Policy and the Economy. He founded and runs the Private Capital Research Institute, a nonprofit devoted to encouraging access to data and research about venture capital and private equity, and serves as vice-chair of the World Economic Forum’s Global Agenda Council on the Future of Investing.
TAP graciously thanks Professor Josh Lerner for sharing his time and insights from his collaboration with Professor Jean Tirole.