A conceptual model for FRAND royalty setting

Setting an industry-wide standard is crucial for the interoperability, compatibility, and efficiency of information and communication technologies. To minimize holdup problems, patent holders are often required to ex-ante commit to licensing their technologies under Fair, Reasonable, and Non-Discriminatory (FRAND) terms. Yet, there is little consensus, in both courtrooms and industries, on the exact meaning of FRAND. We propose a new framework that enables a precise distinction: fairness in the distribution of royalty payments among patent users, and reasonableness in setting the size of the compensation to the patent holder, where both the size and the distribution of payments are determined in a non-discriminatory way that ensures similar firms are treated similarly.