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Abstract:
We study several interconnected problems that arise under the current U.S. patent system when a patent covers one component or feature of a complex product, This situation is common in the information technology sector of the economy. First, we show using bargaining theory that the threat to obtain a permanent injunction greatly enhances the patent holder's negotiating power, leading to royalty rates that exceed a natural benchmark level based on the value of the patented technology and the strength of the patent. Such royalty overcharges are especially great for weak patents covering a minor feature of a product with a sizable price/cost margin. These royalty overcharges do not disappear even if the allegedly infringing firm is fully aware of the patent when it initially designs its product. However, the holdup problems caused by the threat of injunctions are reduced if courts regularly grant stays to permanent injunctions to give defendants time to redesign their products to avoid infringement when this is possible. Second, we show how holdup problems are magnified in the presence of royalty stacking, i.e., when multiple patents read on a single product. Third, using third-generation cellular telephones and Wi-Fi as leading examples, we illustrate that royalty stacking has become a very serious problem, especially in the standard-setting context where hundreds or even thousands of patents can read on a single product standard. Fourth, we discuss the use of reasonable royalties to award damages in patent infringement cases. We report empirical results regarding the measurement of reasonable royalties by the courts and identify various practical problems that tend to lead courts to over-estimate reasonable royalties in the presence of royalty stacking. Finally, we make suggestions for patent reform based on our theoretical and empirical findings.

Abstract:
This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful.

Abstract:
This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful.

Abstract:
Three years ago, the Antitrust Division and the Federal Trade Commission revised their Horizontal Merger Guidelines to articulate in greater detail how they would treat claims of efficiencies associated with horizontal mergers: claims that are frequently made, as for instance in the recently proposed merger between Heinz and Beech-Nut in the market for baby food. While these revisions to the Guidelines have a solid economic basis, they leave open many questions, both in theory and in practice. In this essay, we evaluate some aspects of the treatment of efficiencies, based on three years of enforcement experience under the revised Guidelines, including several litigated mergers, and based on economic principles drawn from oligopoly theory regarding cost savings, competition, and consumer welfare.

Competition, FTC, horizontal merger guidelines, mergers, no-synergies efficiencies, synergy

Abstract:
In several key industries, including semiconductors, biotechnology, computer software, and the Internet, our patent system is creating a patent thicket: an overlapping set of patent rights requiring that those seeking to commercialize new technology obtain licenses from multiple patentees. The patent thicket is especially thorny when combined with the risk of hold-up, namely the danger that new products will inadvertently infringe on patents issued after these products were designed. The need to navigate the patent thicket and hold-up is especially pronounced in industries such as telecommunications and computing in which formal standard-setting is a core part of bringing new technologies to market. Cross-licenses and patent pools are two natural and effective methods used by market participants to cut through the patent thicket, but each involves some transaction costs. Antitrust law and enforcement, with its historical hostility to cooperation among horizontal rivals, can easily add to these transaction costs. Yet a few relatively simple principles, such as the desirability package licensing for complementary patents but not for substitute patents, can go a long way towards insuring that antitrust will help solve the problems caused by the patent thicket and by hold-up rather than exacerbating them.

Abstract:
Patents, patent litigation, and patent settlements increasingly influence competition. Settlements of patent disputes come in many forms, including licensing and cross-licensing agreements, patent pools, mergers, and joint ventures. While frequently procompetitive, such settlements can stifle competition and harm consumers. I propose a specific antitrust rule limiting such settlements: a settlement must leave consumers at least as well off as they would have been from ongoing patent litigation. After establishing that profitable settlements satisfying this constraint generally exist, I show how this antitrust rule can be used to evaluate three types of settlements: mergers, patent pools, and negotiated entry dates.

Abstract:
Intellectual property rights are widely recognized as critical assets in many industries, especially "high-tech" industries. Companies like IBM, Intel, and Hewlett-Packard regard their patents and copyrights, along with their other intangible assets such as know-how, as central elements giving them competitive advantage. Likewise, many software companies, from Microsoft to software startups seeking funding from venture capitalists, recognize that copyright protection is essential if they are to recoup their expenditures developing new software. Put simply, patents and copyrights are often the crown jewels in a high-tech company's collection of assets.

Intellectual property rights, while by no means the only way for firms to recoup their investments in research and development, are of increasing strategic importance in a range of industries, including semiconductors, networking equipment, and biotechnology as well as software. And now, with patents being issued for "business methods" like Amazon's one-click shopping, software patents are poised to have a major impact on the commercialization of the Internet. To cite one very recent example, InterTrust Technologies recently sued Microsoft for patent infringement associated with Windows Media, software that Microsoft plans to include in the new version of Windows, Windows XP, set to come out in August 2001. With InterTrust requesting an injunction to prevent Microsoft from violating the InterTrust patent, this suit, like many others, could potentially have a dramatic impact on competition, in this case for software that handles digital-rights management. As is common in these disputes, the lawsuit followed failed attempts to negotiate a license, and multiple patents are involved; InterTrust asserts that it holds 18 U.S. patents and has filed applications for 47 others.

The increasing importance and number of patents and copyrights inevitably is leading to more and more intellectual property disputes between rights holders and alleged infringers. In fact, since many products can potentially infringe multiple patents, the number of disputes, or the number of licenses needed to resolve those disputes, can easily grow more than proportionately with the number of patents. As I have described elsewhere, more and more companies are facing a patent thicket requiring them to obtain multiple licenses to bring their products to market. No doubt the majority of intellectual property disputes are settled rather than litigated to a final resolution.

The need to negotiate licenses or other settlements of intellectual property disputes is made even greater because of the danger of hidden or submarine patents, which make it all too easy for a company unintentionally to infringe on a patent that was not yet issued when the company's product was designed. Likewise, the need to resolve intellectual property disputes is arguably made yet greater to the extent that the U.S. Patent and Trademark Office has issued "bad" patents, i.e., patents on technology that does not in fact meet the novelty requirement. Many critics have charged that the PTO has had a poor understanding of prior art, especially in the software area, and improperly issued a number of patents. Bad or not, there is no dispute that the number of patents being issued is growing dramatically. In short, a compelling case can be made that intellectual property disputes are of increasing importance in determining just which firms can compete in which markets, and on what terms.

A wide range of commercial arrangements involving intellectual property can be regarded as settlements of intellectual property disputes, either literally (in the sense that litigation has been initiated and is dropped once an agreement is reached) or effectively (because negotiation takes place in the shadow of possible litigation). Virtually every patent license can be viewed as a settlement of a patent dispute: the royalty rate presumably reflects the two parties' strengths or weaknesses in patent litigation in conjunction with the licensee's ability to invent around the patent. The same is true of cross-licenses, where net payments reflect the strength of each party's patent portfolio along with its commercial exposure to the other's patents. Mergers and joint ventures are yet more ways to settle patent disputes.

Given the importance of patents and their licensing to innovation, and given the many commercial arrangements that are effectively settlements of intellectual property disputes, the legal rules governing the resolution of such disputes are of first-order importance. This importance is not confined to high-tech industries, much less to the software and Internet sectors, but extends to all industries where intellectual property rights are significant. In a very real sense, the rules governing settlements affect what is truly meant by the patent grant itself. In fact, in many fast-moving industries, the rules governing patent litigation and settlements are arguably far more important to patentees than the single variable on which economists have traditionally focused, namely patent length.

Abstract:
Economists often assume that a patent gives its owner a well-defined legal right to exclude others from practicing the invention described in the patent. In practice, however, the rights afforded to patent holders are highly uncertain. Under patent law, a patent is no guarantee of exclusion but more precisely a legal right to try to exclude. Since only 0.1% of all patents are litigated to trial, and since nearly half of fully litigated patents are declared invalid, this distinction is critical to understanding the economic impact of patents. The growing recognition among economists and legal scholars that patents are probabilistic property rights has significant implications for our understanding of patents in four important areas: (1) reform of the system by which patents are granted; (2) the legal treatment of patents in litigation; (3) the incentives of patent holders and alleged infringers to settle their disputes through licensing or cross-licensing agreements rather than litigate them to completion; and (4) the antitrust limits on agreements between rivals that settle actual or threatened patent litigation.

Abstract:
Passage of the Sherman Act in the United States in 1890 set the stage for a century of jurisprudence regarding monopoly, cartels, and oligopoly. Among American statutes that regulate commerce, the Sherman Act is unequaled in its generality. The Act outlawed every contract, combination or conspiracy in restraint of trade and monopolization and treated violations as crimes. By these open-ended commands, Congress gave federal judges extraordinary power to draw lines between acceptable cooperation and illegal collusion, between vigorous competition and unlawful monopolization.

By enlisting the courts to elaborate the Sherman Act's broad commands, Congress gave economists a singular opportunity to shape competition policy. Because the statute's vital terms directly implicated economic concepts, their interpretation inevitably would invite contributions from economists. What emerged is a convergence of economics and law without parallel in public oversight of business. As economic learning changed, the contours of antitrust doctrine and enforcement policy eventually would shift, as well.

This article follows the evolution of thinking about competition since 1890 as reflected by major antitrust decisions and research in industrial organization. We divide the U.S. antitrust experience into five periods and discuss each period's legal trends and economic thinking in three core areas of antitrust: cartels, cooperation, or other interactions among independent firms; abusive conduct by dominant firms; and mergers.

Antitrust, Sherman Act

Abstract:
Professor Varian's overview analyzes a variety of competitive strategies used by high-tech companies. These strategies - such as personalized pricing, lock-in, and the adoption of uniform compatibility standards to fuel bandwagon effects - often rely on intellectual property, typically copyrights or patents. Since Professor Varian does not explore this issue at length, we complement his work by focusing on it.

Intellectual property, copyrights, information technology, competition policy

Abstract:
The past forty years have witnessed a remarkable transformation in horizontal merger enforcement in the United States. With no change in the underlying statute, the Clayton Act, the weight given to market concentration by the federal courts and by the federal antitrust agencies has declined dramatically. Instead, increasing weight has been given to three arguments often made by merging firms in their defense: entry, expansion and efficiencies. We document this shift and provide examples where courts have approved highly concentrating mergers based on limited evidence of entry and expansion. We show using merger enforcement data and a survey we conducted of merger practitioners that the decline in antitrust enforcement is ongoing, especially at the current Justice Department. We then argue in favor of reinvigorating horizontal merger enforcement by partially restoring the structural presumption and by requiring strong evidence to overcome the government's prima facie case. We propose several routes by which the government can establish its prima facie case, distinguishing between cases involving coordinated vs. unilateral anti-competitive effects.

Abstract:
The past forty years have witnessed a remarkable transformation in horizontal merger enforcement in the United States. With no change in the underlying statute, the Clayton Act, the weight given to market concentration by the federal courts and by the federal antitrust agencies has declined dramatically. Instead, increasing weight has been given to three arguments often made by merging firms in their defense: entry, expansion and efficiencies. We document this shift and provide examples where courts have approved highly concentrating mergers based on limited evidence of entry and expansion. We show using merger enforcement data and a survey we conducted of merger practitioners that the decline in antitrust enforcement is ongoing, especially at the current Justice Department. We then argue in favor of reinvigorating horizontal merger enforcement by partially restoring the structural presumption and by requiring strong evidence to overcome the government's prima facie case. We propose several routes by which the government can establish its prima facie case, distinguishing between cases involving coordinated vs. unilateral anti-competitive effects.

horizontal mergers, merger enforcement, antitrust, coordinated effects, unilateral effects

Abstract:
We propose a simple, new test for making an initial determination of whether a proposed merger between rivals is likely to reduce competition and thus lead to higher prices. Under current antitrust policy, the government can establish a presumption that a proposed horizontal merger will harm competition by defining the relevant market and showing that the merger will lead to a substantial increase in concentration in that market. However, this approach can perform poorly in markets for differentiated products, where market boundaries are unclear and the proximity of the products sold by the merging firms is a key determinant of the merger's effect on competition. Our test looks for upward pricing pressure (UPP) resulting from the merger. We develop a simple diagnostic for UPP based on the price/cost margins of the products sold by the merging firms and the magnitude of direct substitution between the two firm's products. We argue that our approach is well grounded in economics, workable in practice, and superior to existing methods in a substantial class of mergers.

mergers, antitrust, unilateral effects, market definition, relevant market

Abstract:
We argued in our paper, "Patent Hold-Up and Royalty Stacking," that the threat to obtain a permanent injunction greatly enhances the patent holder's negotiating power, leading to royalty rates that exceed a benchmark level based on the value of the patented technology and the strength of the patent. John Golden, in his extensive comment on our paper, claims: "Lemley and Shapiro err when they claim to have proven that 'patentees whose inventions are only one component of a larger product are systematically overcompensated.'" However, the error is Golden's not ours. When patentees systematically capture value they did not create from others who did create it, they are being overcompensated by any reasonable measure, including the standard economic models on which we relied. In Part II, we briefly respond to his criticism of our empirical study of court-awarded reasonable royalties. Finally, Golden also claims that our recommendation to reduce the availability of permanent injunctions to patent holders who have claims to reasonable royalties but not lost profits remedy "threatens to distort markets for innovation." We strongly disagree. It is patent holdup, which skews damages in ways more favorable to reasonable royalties, that distorts markets for innovation. A rule such as the one we propose, in which damages are calibrated to compensate patentees for their loss, is sensible public policy.

Abstract:
After an investigation lasting several months, in June 1998 the Federal Trade Commission brought an antitrust lawsuit against Intel Corporation based on Intel's conduct towards Intergraph, and similar conduct towards Digital Equipment Corporation and Compaq, all in the context of disputes where Intel was accused of patent infringement. The FTC charged that Intel's practices were an abuse of Intel's monopoly position in microprocessors. Is Intel's conduct anti-competitive and thus illegal under the antitrust laws? That is the central question explored in this paper.

An introductory section provides some background for the case by discussing the tension between intellectual property rights and antitrust law, a tension that is evident in the FTC's dispute with Intel, and by describing the role of patents in the semiconductor industry. Section 3 provides a succinct summary of the facts surrounding Intel's conduct in each of the three patent disputes identified by the FTC. Section 4 explains the FTC's theory of how Intel's conduct was anti-competitive. Section 5 presents Intel's response. Section 6 describes the settlement reached between the FTC and Intel. The final section discusses legal and economic developments since the case was settled and remarks on the lasting implications of the Intel case.

Antitrust, Intel, intellectual property, patent infringement, patent thicket, FTC

Abstract:
This paper reviews antitrust policy during the Clinton administration.

antitrust, antitrust enforcement, mergers

Abstract:
No abstract is available for this paper.

Abstract:
Economists and policy makers have long recognized that innovators must be able to appropriate a reasonable portion of the social benefits of their innovations if innovation is to be suitably rewarded and encouraged. However, this paper identifies a number of specific fact patterns under which the current U.S. patent system allows patent holders to capture private rewards that exceed their social contributions. Such excessive patentee rewards are socially costly, since they raise the deadweight loss associated with the patent system and discourage innovation by others. Economic efficiency is promoted if rewards to patent holders are aligned with and do not exceed their social contributions. This paper analyzes two major reforms to the patent system designed to spur innovation by better aligning the rewards and contributions of patent holders: establishing an independent invention defense in patent infringement cases, and strengthening the procedures by which patents are re-examined after they are issued. Three additional reforms relating to patent litigation are also studied: limiting the use of injunctions, clarifying the way in which "reasonable royalties" are calculated, and narrowing the definition of "willful infringement."

Abstract:
No abstract is available for this paper.

Abstract:
No abstract is available for this paper.

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No abstract is available for this paper.

Abstract:
Exclusivity provisions, exclusive dealing provisions, and exclusive membership rules can create formidable entry barriers when employed by dominant incumbent networks. Exclusivity rules can restrict consumer choice and stifle innovation by denying would-be entrants the ability to gain critical mass, and by undermining consumer confidence in an emerging network. Exclusive membership rules can be especially pernicious in network industries by creating artificial entry barriers that operate on top of naturally occurring entry barriers based on consumer adoption costs, switching costs, and especially consumer coordination costs. These costs are elevated if the new network is incompatible with the established network, as may be required to avoid infringing on the intellectual property rights of the established network. Exclusivity rules are contrasted with a refusal by the incumbent network to permit the new network to interconnect and/or offer backward compatibility.