Journal of Competition Law and Economics Advance Access originally published online on September 17, 2008
Journal of Competition Law and Economics 2008 4(3):535-570; doi:10.1093/joclec/nhn027
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DO PATENT HOLDUP AND ROYALTY STACKING LEAD TO SYSTEMATICALLY EXCESSIVE ROYALTIES?
Correspondence: E-mail: elhauge{at}law.harvard.edu
JEL: K00, K10, K11, K20, K21, K29, K30, K39, K40, K41, K49, L40, L49, L50, L51, L59
Some recent literature has concluded that patent remedies result in systematically excessive royalties because of holdup and stacking problems. This article shows that this literature is mistaken. The royalty rates predicted by the holdup models are often (plausibly most of the time) below the true optimal rate. Further, those predicted royalty rates are overstated because of incorrect assumptions about constant demand, one-shot bargaining, and informational symmetry. Although this literature concludes that overcompensation problems are exacerbated by doctrines measuring damages using past negotiated royalties, in fact such doctrines exacerbate undercompensation problems. Undercompensation problems are further increased to the extent that juries cannot measure damages with perfect accuracy, a problem that persists even if damages are just as likely to be overestimated as underestimated. Nor do the royalty rates predicted by the holdup model apply if there is competition in the downstream product market or upstream market for inventions. Royalty stacking does not lead to royalties that exceed the optimal rate, contrary to this literature, but in fact tends to produce royalties that are at or below the optimal rate.
* Petrie Professor of Law, Harvard Law School, Cambridge, MA, USA. I am grateful for comments on prior drafts from Yochai Benkler, Julie Cohen, Tom Cotter, Aaron Edlin, John Golden, Andrei Goureev, Jim Krier, Anne Layne-Farrar, Mark Lemley, Clarisa Long, Doug Melamed, Ken Reinker, Ben Roin, Carl Shapiro, Steve Shavell, and George Triantis, and for research support from Qualcomm. The conclusions here are mine, not theirs.