What to Do About Unilateral Refusals to License?

Posted by D. Daniel Sokol

Jeffrey K. MacKie-Mason, Arthur W. Burks Professor of Information and Computer Science at the University of Michigan, takes the position in his new working paper What to Do About Unilateral Refusals to License? that policy makers should take economics more seriously in how they think about antitrust/IP and the issue of unilateral refusals to license, particularly in statutory language.  I wonder if in part the problem is that some courts do not understand the complex economics of innovation.

ABSTRACT: There are well-known circumstances under which unilateral refusals to license will cause harm to competition, that is, will lower consumer welfare. However, when the strategy is profitable, refusals to license also increase the returns to intellectual property, and thus limitations on them will reduce the incentives for firms to invest in innovation. The optimal balance between innovation incentives and protection against static monopoly harm is not knowable to any reasonable degree of precision. Economists may be able to identify some special cases in which the desired rule is unambiguously knowable, but these cases will be few.

Given a policy or legal rule, economists can help interpret and apply the rule. Analysis of recent legal statements on the treatment of refusals to license shows that some of the current confusion and frustration in this area can be attributed to failure to formulate the rules in terms of the economic purposes of the underlying statutes. Some attempts to delineate a boundary between cases in which intellectual property protection is absolute and those in which antitrust restrictions may be imposed are based on logical or semantic distinctions that are not related to the economic issues. These attempts will fail to resolve the confusion.