Switching Costs, Path Dependence, and Patent Holdup

16 Pages Posted: 2 Mar 2018  

Thomas F. Cotter

University of Minnesota Law School

Erik Hovenkamp

Harvard Law School; Yale Law School

Norman Siebrasse

University of New Brunswick - Fredericton - Faculty of Law

Date Written: February 21, 2018

Abstract

Patent holdup occurs when a patent holder extracts higher royalties ex post (after the payor has committed to use of the patented technology) than it could have negotiated ex ante, where the difference is not explained by an increase in the technology’s value. To date, the literature principally has focused on — indeed, sometimes conflated — two potential sources of holdup: the sunk costs the user has incurred ex ante to adopt the technology, and the “switching costs” of adopting an alternative ex post. We demonstrate, however, that this literature tends either to over- or underestimate holdup risk, because holdup may arise even when sunk costs are zero, or be absent despite high ex post switching costs. More generally, we show that patent holdup is best understood as an opportunistic exploitation of path dependence, arising when prior commitment to a technology creates some dynamic distortion in the technology’s incremental value over alternatives.

Keywords: patents, patent holdup, path dependence, patent licensing, switching costs, lock-in, standards, standard-essential patents, patent injunctions, hold-up, competition policy, opportunism, antitrust

JEL Classification: KOO, K41, O34, O14, K21, L24

Suggested Citation

Cotter, Thomas F. and Hovenkamp, Erik and Siebrasse, Norman, Switching Costs, Path Dependence, and Patent Holdup (February 21, 2018). Available at SSRN: https://ssrn.com/abstract=3127933 or http://dx.doi.org/10.2139/ssrn.3127933

Thomas F. Cotter

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-7527 (Phone)

Erik Hovenkamp (Contact Author)

Harvard Law School ( email )

Cambridge, MA
United States

Yale Law School ( email )

New Haven, CT

Norman Siebrasse

University of New Brunswick - Fredericton - Faculty of Law ( email )

P.O. Box 4400
Fredericton, New Brunswick E3B 5A3
Canada
506-453-4725 (Phone)
506-453-4548 (Fax)

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