Patent holdup can arise when circumstances enable a patent owner to extract a larger
royalty ex post than it could have obtained in an arm's length transaction ex ante. While
the concept of patent holdup is familiar to scholars and practitioners—particularly in the
context of standard-essential patent (SEP) disputes—the economic details are frequently
misunderstood. For example, the popular assumption that switching costs (those required
to switch from the infringing technology to an alternative) necessarily contribute to
holdup is false in general, and will tend to overstate the potential for extracting excessive
royalties. On the other hand, some commentaries mistakenly presume that large fixed
costs are an essential ingredient of patent holdup, which understates the scope of the
problem.
In this article, we clarify and distinguish the most basic economic factors that contribute
to patent holdup. This casts light on various points of confusion arising in many
commentaries on the subject. Path dependence—which can act to inflate the value of a
technology simply because it was adopted first—is a useful concept for understanding the
problem. In particular, patent holdup can be viewed as opportunistic exploitation of path
dependence effects serving to inflate the value of a patented technology (relative to the
alternatives) after it is adopted. This clarifies that factors contributing to holdup are not
static, but rather consist in changes in economic circumstances over time. By breaking
down the problem into its most basic parts, our analysis provides a useful blueprint for
applying patent holdup theory in complex cases.
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