A simple model is developed to study royalty negotiations between a patent holder and a downstream firm whose product is more valuable if it includes a feature covered by the patent. The downstream firm must make specific investments to develop, design, and sell its product before patent validity and infringement will be determined. The hold-up component of the negotiated royalties is greatest for weak patents covering a minor feature of a product with a high margin between price and marginal cost. For weak patents, the hold-up component of negotiated royalties remains unchanged even if negotiations take place before the downstream firm designs its product. The analysis has implications for the use of injunctions in patent infringement cases.
Binmore, Ken, Avner Shaked, and John Sutton. 1989. “An Outside Option Experiment,” 104(4) Quarterly Journal of Economics 4753–70. link to PDF.
Elhauge, Einer. 2008. “Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?” 4(3) Journal of Competition Law and Economics 3535–70.
Farrell, Joseph, and Carl Shapiro. 2008. “How Strong Are Weak Patents?” 98(4) The American Economic Review 41347–69. Available at: DOI: http://dx.doi.org/10.1257/aer.98.4.1347. 126.96.36.199 [PDF]
Federal Trade Commission. 2003. To Promote Innovation: The Proper Balance Between Competition and Patent Law and Policy. October, Available at: http://www.ftc.gov/os/2003/10/innovationrpt.pdf.
Gallini, Nancy. 2002. “The Economics of Patents: Lessons From Recent U.S. Patent Reform,” 16(2) The Journal of Economic Perspectives 2131–54.
Hall, Bronwyn, and Rose Marie Ziedonis. 2001. “The Patent Paradox Revisited: An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979–1995,” 32 The Rand Journal of Economics 101–28.
Heller, Michael, and Rebecca Eisenberg. 1998. “Can Patents Deter Innovation? The Anti-Commons in Biomedical Research,” 280 Science 698–701.
Lemley, Mark, and Carl Shapiro. 2005. “Probabilistic Patents,” 19(2) Journal of Economic Perspectives 275–98. Available at: http://faculty.haas.berkeley. edu/shapiro/patents.pdf.
Lemley, Mark, and Carl Shapiro. 2007a. “Patent Hold-Up and Royalty Stacking,” 85(7) Texas Law Review 71991–2049. Available at: http://faculty.haas.berkeley.edu/shapiro/stacking.pdf. (see also Patent Hold-Up and Royalty Stacking: Reply)
Lemley, Mark, and Carl Shapiro. 2007b. “Patent Hold-Up and Royalty Stacking: Reply,” 85(7) Texas Law Review 72163–73.
Shapiro, Carl. 2001. “Navigating the Patent Thicket: Cross-Licenses, Patent Pools, and Standard-Setting” in Jaffe Adam Lerner Joshua and Stern Scott, eds., Innovation Policy and the Economy National Bureau of Economics. Available at: http://faculty.haas.berkeley.edu/shapiro/thicket.pdf.
Sidak, J. Gregory. 2008. “Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to Lemley and Shapiro,” 92(3) Minnesota Law Review 3714–48.