The royalty stacking hypothesis states that each standard essential patent (SEP) holder will charge excessive royalties to downstream manufacturers. Royalty stacking creates a Cournot-complement problem, hurts innovation and raises prices paid by consumers. With an equilibrium royalty stacking model with entry we also .nd that, as the number of SEP holders increases and becomes large: (i) downstream sales fall; (ii) downstream concentration increases; (iii) each SEP holder prices less aggressively and her margin falls; (iv) the equilibrium aggregate royalty rate increases almost dollar by dollar if manufacturing unit costs fall in one dollar or quality improvements increase consumers.willingness to pay in one dollar; (v) eventually, the downstream industry may be priced out of existence.
