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

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