Nancy Gallini

Professor
Mathematics of Information Technology and Complex Systems (MITACS), Research Council Member
Neglected Global Disease Initiative, Advisory Board Member
UBC Museum of Anthropology, Advisory Board Member
Canadian Economics Association, Executive Committee Member
Social Sciences and Humanities Research Council of Canada, Council Member

I am a Professor in the Vancouver School of Economics and graduate (PhD, 1980) of the University of California at Berkeley. Prior to coming to the VSE, I was a faculty member in the Department of Economics at the University of Toronto (1979-2002) and Dean of Arts at the University of British Columbia (2002-2010).

My research focuses on the economics of intellectual property, competition policy, strategic alliances, licensing, and optimal patent policy. I’ve served on the editorial boards of the American Economic Review, the International Journal of Industrial Organization and the Journal of Industrial Economics and have worked with the Competition Bureau and Industry Canada on projects related to Canada’s patent policy and Intellectual Property Enforcement Guidelines.

Please click on paper titles for abstracts and full text downloads.

JOURNAL PUBLICATIONS

I examine the efficiency of patent pooling in a setting that allows for the interplay between the standards process, in which owners of essential intellectual property (IP) develop a new product, and the subsequent pooling decision, in which IP prices are coordinated.  If one of the IP owners is also the incumbent of a product that employs the current competing standard - referred to as overlapping ownership - then the relationship among the IP owners will be both vertical through their IP, and horizontal through their competing interests in the final products.  Consumers are better off when IP owners cooperate, even when these owners are effectively competitors, because of lower prices and greater product variety.  Consumers prefer, however, that the agreements not admit firms with overlapping ownership.  These results inform antitrust policy on cooperative agreements among competitors.

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Inventors and users of technology often enter into cooperative agreements for sharing their intellectual property in order to implement a standard or to avoid costly litigation. Over the past two decades, U.S. antitrust authorities have viewed pooling arrangements that integrate complementary, valid and essential patents as having pro-competitive benefits in reducing prices, transactions costs, and the incidence of legal suits. Since patent pools are cooperative agreements, they also have the potential of suppressing competition if, for example, they harbor weak or invalid patents, dampen incentives to conduct research on innovations that compete with the pooled patents, foreclose competition from downstream product or upstream input markets, or soften competition with outside substitutes that do not rely on the pooled patents. In synthesizing the ideas advanced in the economic literature, this paper explores whether these antitrust concerns apply to pools with complementary patents and, if they do, the implications for competition policy to constrain them.

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This paper analyzes and compares two types of cooperative agreements that combine Intellectual Property (IP): patent pools and copyright collectives. I evaluate antitrust policy in three environments in which owners of the intellectual property (IP): (1) are vertically integrated into the downstream (product) market; (2) face competition in the upstream (input) market and (3) own downstream products that do not require a license on the pooled IP but compete with products that do. Although patent pools and copyright collectives differ in purpose, membership size and market conditions, their efficiency implications are qualitatively similar in each of the three situations. Therefore, a uniform rather than IP-specific competition policy is appropriate for pools and collectives, thus lending economic support for the approach followed by antitrust authorities toward IP-related cooperative agreements.

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Intellectual property is not the only mechanism used in the American economy for rewarding R&D. Prizes and contract research of various types are also com- mon. Given the current controversies that swirl around intellectual property policies, we review the economic reasoning that supports patent and other intellectual property over the alternatives. For those economic environments where intellectual property is justified, we review some of the arguments for why it is designed as it is. We focus particularly on the issue of how broad awards should be and how much protection should go to the original inventor (as opposed to those who subsequently improve the invention). We emphasize that the ideal design of an intellectual property system depends on the ease with which rightsholders can enter into licensing and other contractual arrangements involving these rights.

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U.S. patent reform over the past two decades has strengthened the legal enforcement of patent rights and has extended protection to new subject matter, such as genetically engineered life forms and business methods. This paper highlights these and other policy changes and the debate that this apparent increase in protection has sparked. While the case for stronger patents as a spur to innovation is a weak one, as revealed by recent theoretical and empirical research, evidence that they encourage disclosure and technology transfer is persuasive. The paper discusses the social costs and benefits of these effects from the policy changes and proposals for alleviating the costs through further patent reform.

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Parallel imports are genuine products imported without the authorization of the trademark or copyright owner in a country. Authorized dealers have employed trademark and copyright law to exclude parallel imports using claims of infringement. Our assertion is that trademark and copyright laws are inappropriate for enforcing restrictions against parallel imports for two reasons. First, trademark exclusion of parallel imports indiscriminately eliminates intrabrand competition and should be scrutinized from an antitrust perspective. Second, trademark laws inefficiently constrain the feasible set of distribution systems. We propose a policy combining contract, tort, and antitrust law to regulate parallel imports.

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In this article we examine the interaction between firms' product and process innovation decisions, and the role patent policy can play in directing technological change toward a socially efficient mix of innovations. Product innovation is a variant on a pioneer's new product; process innovation improves upon the cost efficiency of production. In a model with heterogeneous consumers, we show that an entrant relaxes competition by trading off too much process innovation in favor of product innovation, relative to what the social planner would desire. This bias toward product innovation can be corrected through appropriate choice of patent breadths on product and process innovations.

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This article extends the theory of optimal patents to allow for costly imitation of patented innovations. With costly imitation, a rival's decision to imitate depends on the length of patent protection awarded to the patentee: the longer the patent life, the more likely it is that rivals will "invent around" the patented product. Extending patent life, therefore, may not provide the innovator with increased incentives to research or to patent the innovation. In this case, I find that optimal patent lives are sufficiently short to discourage imitation. With both patent length and breadth as instruments, the optimal policy consists of broad patents (no imitation allowed) with patent lives adjusted to achieve the desired reward. These results are in sharp contrast to recent results on the optimality of narrow, infinitely long patents.

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Licensing contracts for newly patented innovations are observed to vary along several dimensions, including the form and size of the payment to the inventor (fixed fee versus some output-based royalty), the degree of exclusivity, and the division of rents. In this article, we show that the form of the contract can be explained by two problems in technology exchange: the superiority of a licensor's precontractual information about the economic value of the innovation and the fact that sharing this information with the licensee may facilitate imitation. We show that a licensor signals her technology type with an output-based payment (or royalty) and may leave some of the rents with the licensee. Conditions under which exclusive license contracts (linear and nonlinear) and nonexclusive linear contracts are used to transfer technology are identified.

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In this paper, we adopt a disaggregate approach to modelling the components of gasoline demand. Gasoline demand in our model is viewed as the outcome of the following household decisions: vehicle holdings (number and type) and vehicle usage (non-discretionary and discretionary usage). Modelling gasoline demand in this way correctly specifies gasoline as an input into the production of transportation services and allows for the interdependence between household decisions on vehicle holdings and usage. Moreover, estimation of the components of gasoline demand allows policy makers to identify the means by which individuals will respond to policy changes. This leads to more effective policies designed to reduce gasoline consumption. We use this model to estimate price and fuel efficiency elasticities of vehicle usage and gasoline demand.

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This paper examines the dynamically consistent price path for a new product monopolist, unable to commit to future prices, when consumers must incur setup costs of adopting the product. We find that setup costs give rise to a price path with introductory sales: along the path, periods of high prices during which only locked-in or captive customers buy the product alternate with sales (low-price) periods during which new customers adopt the product. As the stock of captive customers increases over time, sales become less frequent; after the customer base reaches some critical level, no further sales take place. We show that the monopolist may hold a `sleeping patient' in which initial sales of the product are postponed to avoid locking into a high-pricing strategy that ignores new customers.

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We show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: The monopolist cannot guarantee low future prices once customers have incurred those costs. We show that, if customers anticipate this problem, the monopolist's profits can be improved through ex ante commitment to competition in the post-adoption market, if setup costs are large. If setup costs are small, the monopolist can typically achieve the same level of profits without price commitment as with.

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A case study in which a three-stage choice model of Canadian household vehicle holdings and usage is used to generate short-run forecasts of changes in household vehicle usage and gasoline consumption in response to a range of energy-related policies. The objectives of this case study are to (1) demonstrate the application of disaggregate choice modelling methods to the generation of policy-relevant forecasts of travel behaviour; (2) draw implications from this forecasting exercise concerning the likely impacts of various energy-related policies; and (3) assess some of the strengths and weaknesses of the current state-of-the-art of forecasting with disaggregate choice models, using the presented study as a case in point.

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This article analyzes licensing in a noncooperative R&D game. We ask two questions: What are the incentives for licensing a production technology and what is the impact of licensing on the pattern of innovation and the consequent evolution of industry costs and market structure? The gains from trading information through licensing contracts are achieved through the replacement of inefficient production techniques (the ex post incentive) and the elimination of inefficient research expenditures (the ex ante incentive). In a duopoly the availability of licensing encourages research when the firms' initial production technologies are close in costs and discourages research when initial costs are asymmetric.

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This paper demonstrates that vertical restraints are profitably imposed by a manufacturer or wholesaler who has some market power and whose product is sold in a monopolistically competitive downstream market. Simple conditions are developed under which a price floor (resale price maintenance) or a price ceiling is profitable, and under which private incentive for a restraint is sufficient for its social desirability. Where demand elasticities are constant, observed vertical price floors are always welfare-improving but profitable price ceilings may decrease welfare. In the special case of the CES-aggregate-surplus specification with competitive conjectures, price ceilings are profitable and welfare-decreasing.

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In this paper the conservation potential of gasoline in the Canadian transportation sector is estimated. A model of gasoline demand and of technological change in the automobile industry is developed that identifies several responses by individuals to an increase in the gasoline price. In addition to the demand responses to rising gasoline prices of driving fewer miles, purchasing fewer automobiles, and buying more fuel-efficient cars, automobile manufacturers may alter the technology of new automobiles produced in the future, given their expectations about changing consumers' demands for more fuel-efficient cars. Allowing for these adjustments by consumers and producers to increases in the gasoline price yields larger price elasticities than have been estimated in previous studies. The total short-run price elasticity estimates of gasoline consumption range from -0.3 to -0.4; the five-year intermediate run estimates range from -0.6 to -0.8; and the ten-year long-run estimated price elasticity reaches -0.7 to -0.9. Since the technological changes in the fuel efficiency that result from a rise in the gasoline price gradually decrease the gasoline costs per mile over time, vehicle holdings begin to approach the level that prevailed prior to the gasoline price rise. Hence, the response in gasoline consumption to a change in the gasoline price may actually be lower in the longer run than in the intermediate run.

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In this paper, a sequential research and development programme is considered for which several categories of related technologies are available to develop, each having the potential to produce some final product. At each stage of the programme, an optimal portfolio of technologies is chosen, given the information acquired from the previous stages, and those contingent optimal plans are followed in all subsequent stages. The model is applied to coal liquefaction technologies to emphasize the costs that may be incurred by erroneously approaching the development programme as a once-and-for-all endeavour rather than in a sequential framework. The results of the synthetic oil application indicate that the acceleration of the programme may be optimal when the probability of successful development decreases. Under these conditions, adoption of a ‘crash programme’ in which all projects are researched simultaneously, may lead to deferral of synthetic oil development.

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EDITED BOOKS


WORKING PAPERS

Countries world wide face an imminent global health crisis. As resistant bacteria render the current stock of antibiotics ineffective and the pipeline of back-up drugs runs dry, pharmaceutical companies are abandoning their research in antibiotics.  In this paper we ask: Why are pharmaceutical companies closing antibiotic research labs when the stakes are so high? Implementing a simple dynamic framework, we show that the environment for new antibiotics is relatively hostile, compared to other medicines, due to market failures that result in excessive use and acceleration of natural selection. The analysis reveals, however, that increased competition between drugs can actually slow down the rate of resistance without, in some cases, diluting research incentives. Bolstered by scientific… evidence, this result arises from a fundamental interplay between economic and biological externalities. We propose a patent-antitrust regime for achieving efficient drug research and usage that calls for a revised justifi…cation of the patent system.

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I examine the private and social efficiency of patent pools in a setting in which owners of intellectual property (IP), are both vertically and horizontally related.  The relationship is vertical through the ownership of complementary IP and horizontal in that at least one member owns a competing product.  For this hybrid structure - referred to as overlapping ownership - I analyze the interplay between two organizational decisions: the standard-setting process in which participants choose a product type (indexed by its differentiation from the current standard), and the subsequent patent pooling decision.  Consumers can be better off with patent pooling as a result of lower prices (the complements effect) and greater product variety (the differentiation effect), even when a pool member is also a competitor of the new standard.  However, in comparing new product collaborations across ownership regimes, consumers prefer those that admit no overlapping ownership.  These results yield insights for antitrust rules promoting efficient IP agreements.

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The paper examines technology agreements and the standards process from which they emerge when members supply inputs to the alliance while simultaneously competing with it. Under this overlapping ownership structure, pool members are horizontally related. I show that strategic complementarity between the downstream products owned by a member and those arising from the collaboration is sufficient for a pool to be pro-competitive. Although patent pools are more efficient than uncoordinated pricing, consumers are better off if an outside firm rather than a pool member owns the non-pool competing product. Antitrust rules facilitating efficient IP agreements under overlapping ownership and their implications for the direction of technological change are derived.

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Inventors and users of technology often enter into cooperative agreements for sharing their intellectual property in order to implement a standard or to avoid costly infringement litigation. Over the past two decades, U.S. antitrust authorities have viewed pooling arrangements that integrate complementary, valid and essential patents to have “pro-competitive benefits†in reducing prices, transactions costs, and the incidence of costly infringement suits. Since patent pools are cooperative agreements, they also have the potential of suppressing competition if, for example, they harbor weak or invalid patents, dampen incentives to conduct research on innovations that compete with the pooled patents, foreclose competition from downstream product or upstream innovation markets, or raise prices on goods that compete with the pooled patents. In synthesizing the ideas advanced in the economic literature, this paper explores whether these antitrust concerns apply to pools with complementary patents. Special attention is given to the U.S. Department of Justice-Federal Trade Commission Guidelines for the Licensing of Intellectual Property (1995) and its application to recent patent pool cases.

[go to paper]

Intellectual property is not the only mechanism used in the American economy for rewarding R&D. Prizes and contract research of various types are also com- mon. Given the current controversies that swirl around intellectual property policies, we review the economic reasoning that supports patent and other intellectual property over the alternatives. For those economic environments where intellectual property is justified, we review some of the arguments for why it is designed as it is. We focus particularly on the issue of how broad awards should be and how much protection should go to the original inventor (as opposed to those who subsequently improve the invention). We emphasize that the ideal design of an intellectual property system depends on the ease with which rightsholders can enter into licensing and other contractual arrangements involving these rights.

[go to paper]

Parallel imports are genuine products imported without the authorization of the trademark or copyright owner in a country. Authorized dealers have employed trademark and copyright law to exclude parallel imports using claims of infringement. Our assertion is that trademark and copyright laws are inappropriate for enforcing restrictions against parallel imports for two reasons. First, trademark exclusion of parallel imports indiscriminately eliminates intrabrand competition and should be scrutinized from an antitrust perspective. Second, trademark laws inefficiently constrain the feasible set of distribution systems. We propose a policy combining contract, tort, and antitrust law to regulate parallel imports.

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In this paper we offer an explanation for the practice of dual distribution. the simultaneous use of franchises and company owned outlets for distributing new products. Our explanation rests on the observation that franchisors often acquire private information, not available to franchisees, on product demand through marketing efforts. Under this assumption of asymmetric information, we show that a franchisor will use both direct ownership as well as the franchise contract to convey information about a new product. This explanation for dual distribution relies neither on capital market imperfections nor upon location-specific factors, in contrast to alternative explanations advanced in the literature Testable implications of the signaling model are discussed.

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We show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: The monopolist cannot guarantee low future prices once customers have incurred those costs. We show that, if customers anticipate this problem, the monopolist's profits can be improved through ex ante commitment to competition in the post-adoption market, if setup costs are large. If setup costs are small, the monopolist can typically achieve the same level of profits without price commitment as with.

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