Why Patent Monopsonies Increase Consumer Welfare

Technical standards are an essential part of how the modern world operates. Standards enable different devices to communicate with each other, use the same power supply and even exchange data. These standards are created by groups of companies coming together through standard settings organizations (SSOs). Besides defining standards, SSOs set policies that affect how much member companies charge for their standard essential patents (SEPs). Unsurprisingly, many companies want to pay less for these patents. But as SSOs adopt policies that lower patent prices, their conduct begins to look like collusion subject to antitrust scrutiny. Indeed, classic economic theory suggests that when a monopsonist (or multiple oligopsonists) lowers prices, it also lowers output and creates deadweight loss. In economic terms, lowering prices harms static consumer welfare. Presumably, that is why Makan Delrahim, the Assistant Attorney General for the Antitrust Division of the Department of Justice (DOJ) in the Trump administration, adopted policies that caution SSOs against these practices. This paper argues that these policies results from a misunderstanding of economic theory. The monopsony problem is typically discussed in the context of private goods, goods which are both excludable and rivalrous. While patent licenses are excludable (i.e. a licensor can refuse to grant the license), they are not rivalrous because the grant of one license does not prevent the simultaneous grant of licenses to other companies. This combination of traits means that patent licenses are not private goods, but a type of “artificially scarce goods” also sometimes known as a “club good.” Importantly, the economics of artificially scarce goods is fundamentally different than the economics of private goods. When a monopsonist buying artificially scare goods lowers prices, its increases output and reduces deadweight loss. In economic terms, lowering price for artificially scarce goods enhances static consumer welfare. Thus, the core rationale for prosecuting monopsonies under antitrust law, increasing allocative efficiency, does not apply to patent monopsonies like SSOs. Trump’s Antitrust Division also tried to justify the use of antitrust law to strengthen patents rights and increase innovation incentives. While antitrust law certainly has a role in guarding against conduct that suppresses innovation, antitrust law was never meant to create innovation incentives themselves. That is the role of patents. More particularly, patent law calibrates incentives to properly encourage innovation without unduly discouraging subsequent follow-on innovation. Unless there are reasons to believe that patent monopsonies are harming innovation, antitrust law should not interfere with the balance patent law seeks to strike. When SSOs implement a policy lowering rates to reflect the contribution a SEP makes to the standard, the policy is simply reinforcing a patent law principle called “apportionment.” Thus, antitrust law should not oppose such a policy.