Switching Costs, Path Dependence, and Patent Holdup
Posted: 2 Mar 2018 Last revised: 22 Feb 2019
Date Written: February 21, 2018
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: Suggested Citation