Froeb & Ganglmair on Antitrust and Patent Holdup

Josh Wright —  18 February 2009

Luke Froeb and Bernard Ganglmair have posted An Equilibrium Analysis of Antitrust as the Solution to Patent Holdup.  Here’s the 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. O ering 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 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.

Here’s a key paragraph from the conclusion summing up the policy implications of the model:

In our theoretical model, we have shown that antitrust liability is less efficient than simple contracts in minimizing the costs of hold up. We have also shown that the mandatory nature of antitrust parties cannot contract around it means that parties cannot simply choose between antitrust or contracts. The threat of antitrust liability on top of simple contracts shifts bargaining rents from creators to users of intellectual property in an inefficient way.

This is an important addition to the growing body of literature which is skeptical of the benefits of using antitrust remedies as the solution to standard contractual issues involving ex post opportunism or “holdup.”  (see also Elhauge 2008, Geradin et al 2006, Layne-Farrar et al 2006 and others).  Though they take a different but complementary analytical path, Froeb and Ganglmair endorse Kobayashi and Wright’s proposition that the social costs of layering antitrust remedies on top of standard contract remedies for patent holdup are likely to outweigh the benefits.  What is interesting is that this skeptical literature seems to be emerging at the same time as an abundant enthusiasm for expanding the scope of the patent holdup agenda with Section 5 of the FTC Act and while the Supreme Court is considering (and I argue, should be rejecting) the FTC’s petition for cert in FTC v. Rambus.