Intellectual Property Clear inghouses: The Effects of Reduced Transaction Costs in Licensing

We focus on downstream uses that combine multiple intellectual property rights and examine the effects of introducing an intellectual property clearinghouse that reduces transaction costs associated with licensing. We show that this causes equilibrium royalties to rise in some cases and may harm licensors due to the 'tragedy of the anticommons'. Downstream welfare effects may also be positive or negative and we characterise the effects on downstream manufacturers and final consumers. We also show that total welfare is most likely to increase following a transaction cost reduction when the number of intellectual property rights per downstream use is small, or if rights are relatively substitutable in downstream use, but it is also possible for welfare to decrease.