Patent Hold Up and Antitrust: How a Well-Intentioned Rule Could Retard Innovation

Journal of Industrial Economics 60(2), pp. 249-273, June 2012

26 Pages Posted: 11 Feb 2009 Last revised: 22 Oct 2014

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

Bernhard Ganglmair

University of Mannheim - Department of Economics; Centre for European Economic Research (ZEW) - Competition and Regulation Research Group

Gregory J. Werden

U.S. Department of Justice - Antitrust Division

Date Written: December 3, 2010

Abstract

Licensing technology essential to a standard can present a hold-up problem. After designing new products incorporating a standard, a manufacturer could be confronted by an innovator asserting patent rights to essential technology. A damages remedy provided by antitrust or some other body of law solves this hold-up problem, inducing the socially optimal level of investment by the manufacturer, but it can reduce the innovator's licensing revenue and thereby retard innovation. The availability of an ex post damages remedy similarly alters the licensing terms in ex ante bargaining, with the result that fewer socially beneficial R\&D projects are undertaken.

Keywords: patent hold-up, option contract, reasonable and nondiscriminatory royalties (RAND), antitrust

JEL Classification: D21, K21, L14, L4

Suggested Citation

Froeb, Luke M. and Ganglmair, Bernhard and Werden, Gregory J., Patent Hold Up and Antitrust: How a Well-Intentioned Rule Could Retard Innovation (December 3, 2010). Journal of Industrial Economics 60(2), pp. 249-273, June 2012. Available at SSRN: https://ssrn.com/abstract=1735587 or http://dx.doi.org/10.2139/ssrn.1735587

Luke M. Froeb (Contact Author)

Vanderbilt University - Owen Graduate School of Management ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-322-9057 (Phone)
615-343-7177 (Fax)

Bernhard Ganglmair

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Centre for European Economic Research (ZEW) - Competition and Regulation Research Group ( email )

L7,1
Mannheim, 68161
Germany

Gregory J. Werden

U.S. Department of Justice - Antitrust Division ( email )

450 Fifth Street, NW
9th Floor
Washington, DC 20530
United States
202-307-6366 (Phone)

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