The Fallacies Of Patent-Holdup Theory

Patent-holdup theory avers that the patent system threatens the rate of innovation in the U.S. economy, particularly in information technology industries that are heavily reliant on standard-essential patents. We show that arrays of empirical tests falsify the core predictions of the theory. We therefore examine the logic of patent-holdup theory. We show that patent-holdup theory conflates two mutually inconsistent economic mechanisms: holdup (the appropriation of a quasi rent) and the exercise of monopoly power (to set the market price to extract a monopoly rent). Moreover, three fallacies underpin patent-holdup theory: (1) that patent holdup is a straightforward variant of holdup as it is understood in transaction-cost economics; (2) that royalty stacking is holdup repeated multiple times on the same product; and (3) that standard-essential patents contribute little or no value to the markets they help create. These fallacies give rise to a theory that is logically inconsistent and incomplete, and that ignores economic fundamentals. The flaws in logic of patent-holdup theory, and its lack of fit with the evidence, suggest that a new theory about the mechanics and dynamics of SEP-intensive IT industries is called for, both as a matter of science and as a guide to antitrust and patent policies.