The "License as Tax" Fallacy

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Intellectual property licenses are commonly portrayed as a “tax” that limits access to technology assets, thereby stunting innovation by intermediate users and inflating prices for end-users. This presumptively skeptical view motivated postwar antitrust’s proliferation of per se rules against a wide array of licensing practices and, more recently, has driven recent Supreme Court decisions on IP licensing and enforcement actions by competition regulators in the U.S. and other commercially significant jurisdictions that would effectively rewrite licensing arrangements in wireless communication markets. Renewed skepticism toward IP licensing, and associated judicial and regulatory interventions, overlook the fact that IP licenses typically play an enabling rather than exclusionary function by mitigating expropriation risks that would otherwise frustrate transactions between the holders of complementary specialized IP and non-IP assets. These transactions support a robust innovation ecosystem by facilitating value-creating exchanges of knowledge assets, promoting the division of labor among innovation and production specialists, and lowering entry costs for firms that excel in innovation but lack capital-intensive production and distribution capacities. Illustrative evidence is drawn from paradigm transactional structures that illustrate the principal enabling functions of IP licensing arrangements in content and technology markets.