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Error Costs, Ratio Tests, and Patent Antitrust Law

Author

Listed:
  • Keith N. Hylton

    (Boston University)

  • Wendy Xu

    (Boston University)

Abstract

This paper examines the welfare tradeoff between patent and antitrust law. Since patent and antitrust law have contradictory goals, the question that naturally arises is how one should choose between the two in instances where there is a conflict. One sensible approach to choosing between two legal standards—or between proof standards with respect to evidence—is to consider the relative costs of errors. The approach in this paper is to consider the ratio of false positives to false negatives in patent antitrust. We find that the relevant error-cost ratio for patent antitrust is the proportion of the sum of the monopoly profit and the residual consumer surplus to the deadweight loss. This error-cost ratio—for a wide range of deterministic demand functions—ranges from infinity to a low of roughly three. This suggests that patent antitrust law should err on the side of protecting innovation incentives.

Suggested Citation

  • Keith N. Hylton & Wendy Xu, 2020. "Error Costs, Ratio Tests, and Patent Antitrust Law," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(4), pages 563-591, June.
    • Handle: RePEc:kap:revind:v:56:y:2020:i:4:d:10.1007_s11151-020-09761-3
    DOI: 10.1007/s11151-020-09761-3
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    References listed on IDEAS

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    3. Richard Gilbert & Carl Shapiro, 1990. "Optimal Patent Length and Breadth," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 106-112, Spring.
    4. Keith N. Hylton & Haizhen Lin, 2014. "Innovation And Optimal Punishment, With Antitrust Applications," Journal of Competition Law and Economics, Oxford University Press, vol. 10(1), pages 1-25.
    5. William D. Nordhaus, 1967. "The Optimal Life of a Patent," Cowles Foundation Discussion Papers 241, Cowles Foundation for Research in Economics, Yale University.
    6. Yannis Katsoulacos & David Ulph, 2009. "On Optimal Legal Standards For Competition Policy: A General Welfare‐Based Analysis," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 410-437, September.
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    Cited by:

    1. Leandro M. Meller, 2022. "Patent Length and Breadth as Policy Instruments: A Systematic Review of Recent Contributions to the Theory of Optimal Patent Design," Working Papers 192, Red Nacional de Investigadores en Economía (RedNIE).
    2. Roger D. Blair, 2020. "The Intellectual Property-Antitrust Interface," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(4), pages 557-561, June.

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    More about this item

    Keywords

    Patent antitrust; Patent monopoly; False positives; False convictions; False negatives; False acquittals; Error costs; Ratio tests;
    All these keywords.

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law

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