Hedonic Prices and Patent Royalties: Epilogue

J. Gregory Sidak & Jeremy O. Skog

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Hedonic price analysis is an econometric methodology that enables one to isolate the value attributable to each component of a multicomponent product. By regressing a product’s total price on the product’s characteristics, hedonic price analysis enables one to determine how much consumers are willing to pay for individual components of a multicomponent product.

In our 2017 article, Hedonic Prices and Patent Royalties, we developed a hedonic price model for memory modules used in enterprise servers to estimate the incremental value attributable to the DDR4 LRDIMM standard above and beyond the next-best technology standard (which was the RDIMM standard). After estimating the incremental value of the DDR4 LRDIMM standard using our hedonic price model, we apportioned that value across holders of patents essential to the DDR4 LRDIMM standard on the basis of a forward-citation weighting methodology to calculate the value attributable to each standard-essential patent (SEP). We then used that information to determine a royalty range that would be reasonable and nondiscriminatory (RAND) for a given SEP holder to charge to license its SEPs on the basis of the value that it contributed to the standard.

In this epilogue, we supplement the hedonic price analysis contained in our 2017 article by examining whether the specification of our hedonic price model for memory modules is robust to an objective variable-selection methodology based on a machine-learning algorithm—the least absolute shrinkage and selection operator (LASSO) regression. Put differently, we analyze whether using a LASSO regression to select independent variables on an objective basis would produce a specification of the hedonic price model similar to our original model in the 2017 article, and we find that it does.

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J. Gregory Sidak & Jeremy O. Skog, Hedonic Prices and Patent Royalties: Epilogue, 4 Criterion J. on Innovation 401 (2019).

J. Gregory Sidak is the chairman of Criterion Economics. He testifies as an expert economic witness in complex business disputes throughout the Americas, Europe, Asia, and the Pacific, and he has twice served as Judge Richard Posner’s court-appointed neutral economic expert on patent damages. Sidak held the Ronald Coase Professorship of Law and Economics at Tilburg University in The Netherlands and the F.K. Weyerhaeuser Fellowship in Law and Economics at the American Enterprise Institute for Public Policy Research. He has also been a senior lecturer at the Yale School of Management and a visiting professor at Georgetown University Law Center. Sidak received A.B. and A.M. degrees in economics and a J.D. from Stanford University. He was Judge Posner’s first law clerk, served on the senior staff of the Council of Economic Advisers in the Executive Office of the President, and was deputy general counsel of the Federal Communications Commission. Sidak has published six books and roughly 200 articles or book chapters. The Supreme Court of the United States, the Supreme Court of Canada, the European Commission, state supreme courts, the U.S. Courts of Appeals, and many other courts and regulatory bodies have cited his writings approvingly.

Jeremy Skog is a Vice President at Criterion Economics. He received his Ph.D. in economics from the Wharton School at the University of Pennsylvania. He also holds an A.B. from Dartmouth College with a double major in physics and economics and an M.A. in economics from Tufts University. He specializes in the use of econometrics and quantitative methods of risk analysis to value complex assets, such as patent portfolios and innovative financial instruments. He previously worked at the U.S. Census Bureau as a subject matter expert in assets and retirement saving where he worked with a variety of survey and administrative data, as well as redesigning the pensions and retirement expectations section of the Social Security Administration Supplement to the Survey of Income and Program Participation.