The Welfare Effects of Government Intervention into the Licensing ofStandard-Essential Patents
An Analysis of the Chinese Smartphone and SoC Markets
Mariko Watanabe and Kensuke Kubo ∗November 10, 2023

Abstract
The licensing of standard-essential patents (SEPs) in the cellular communications field has beena contentious issue. In particular, the licensing policies of Qualcomm for third-generation (3G) and
fourth-generation (4G) cellular communication standards has been the subject of several lawsuits
and government intervention episodes. Given Qualcomm’s dual role as a technology licensor aswell as a supplier of baseband modem chips and System-on-Chips (SoCs) to smartphone manufacturers, there has been a concern that Qualcomm’s royalties on smartphone sales could create an
anticompetitive “margin squeeze” against rival SoC manufacturers. It has also been claimed that
Qualcomm’s policies cause consumers to pay higher prices for smartphones. We evaluate the impactof the most drastic intervention to date – the Chinese government’s 2015 policy to forcibly lower
Qualcomm royalty rates. Using a simple theoretical model, we argue that such an intervention
could have ambiguous effects on consumers – it could lead to higher or lower smartphone prices.
To quantify the policy’s impact, we construct a structural econometric model of the Chinese smartphone and SoC markets which allows for strategic pricing in the two vertically related markets.
Counterfactual analysis using the estimated model allows us to quantify the intervention’s impact
on smartphone manufacturers’ marginal costs and their product prices. Our simulation results
for the Beijing market in 2018 indicate that the intervention caused smartphone manufacturers’
marginal costs to increase by 0.74 percent on average. However, this was more than offset by smartphone manufacturers’ incentive to lower their prices under the reduced royalty rate, leading to a
reduction in smartphone prices of 0.35 percent on average. These results suggest that the Chinese
government’s intervention had the intended effect on consumer welfare, although its magnitude wasfairly limited.

JEL classification number L42 L63 O34
Keywords Patents, Competition Policy, Vertical Restraints, Semiconductor Industry, China∗Watanabe:
Faculty of Economics, Gakushuin University, Mejiro 1-5-1, Toshima-ku, Tokyo, Japan,mariko.watanabe@gakushuin.ac.jp. Kubo: Faculty of Business and Commerce, Keio University, Mita 2-15-45, Minatoku, Tokyo, kuboken@fbc.keio.ac.jp. Acknowledgements: This study was conducted as part of the “Empirical Researchon the Changing Chinese Economy: Upgrading, Expansion, Structural Reform” sub-project within the “Studies onTransformations of International Systems and their Impact on Japan’s mid and long-term competitiveness” project at
the Research Institute of Economy, Trade, and Industry (RIETI). We thank Asei Ito, Chi-hung Kwan, Kai Kajitani,Ying Ting, Ma Xinxin and participants at the RIETI Discussion Paper seminar for their comments and suggestions.
The Gfk China Smartphone Market Audit Survey data which we used for our empirical analysis was provided by RIETI(for 2011 to 2014) and Japan Science Promotion Fund (No.17K18567 and 21K18442, represented by Watanabe, for 2015
to 2018). Yoshiharu Shimizu (Techanalye Co. Ltd.) and Fujio Kawashima (Kobe University) provided helpful guidancefor starting the project.

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