Friday, March 6, 2009
Posted by D. Daniel Sokol
Luke Froeb, Vanderbilt University - Owen Graduate School of Management and Bernhard Ganglmair, University of Zurich have a new insightful paper on An Equilibrium Analysis of Antitrust as a Solution to the Problem of Patent Hold-Up.
ABSTRACT: After downstream manufacturers make relationship-specific investments to develop products using upstream patented technology, they can be "held-up" by patentees, sometimes called "patent ambush." If manufacturers anticipate hold-up, they will be reluctant to make relationship-specific investments which, in turn, reduces the innovator's incentive to create patented technology. Offering manufacturers access to antitrust courts to address the problem of hold-up can improve welfare. However, in contrast to the default rules provided by contract law, parties are unable to contract around mandatory laws like antitrust. This raises the possibility that antitrust would disrupt other, more efficient contractual and organizational solutions to the problem of hold-up. In this paper, we analyze the equilibrium bargaining that occurs between the creators and users of patented technology and find that antitrust does displace more efficient simple contracts, i.e., ones that give innovators the incentive to innovate and manufacturers the incentive to develop products using patented technology.