A Note on Antitrust Issues in the Licensing of Intellectual Property

Intellectual property licensing is becoming an increasingly important economic activity, and licensing practices pose ever more complex antitrust issues. This note discusses Richard Gilbert and Carl Shapiro’s paper on the subject. First, I consider which aspects of contractual penalty clauses -the subject of much of their paper -are most likely to cause welfare losses. Second, I explain why certain anticompetitive practices that, as they indicate, cause static inefficiency are also likely to be undesirable after taking into account that such practices may increase the ex ante rewards to innovators. Third, I comment on how problems posed by standard-setting might be addressed. Forthcoming in Brookings Papers on Economic Activity: Microeconomics (1977) JEL Classes L41, L42, K21, O34 Harvard Law School and National Bureau of Economic Research. I thank the John M. Olin Center for Law, Economics, and Business at Harvard Law School for financial support. 0 It is difficult to overstate the importance of intellectual property licensing or the complexity of the antitrust issues it raises. Accordingly, Richard Gilbert and Carl Shapiro’s (1997) paper is a welcome contribution. Indeed, the reader is treated to two papers for the price of one: first, an industrial organization paper that analyzes contractual penalty clauses and, second, a tour through many of the antitrust policy problems involved with intellectual property licensing. What ties these papers together is that many antitrust concerns with licensing are illuminated by an understanding of penalty clauses. But this is not the case for other antitrust questions, and penalty clauses are significant independently of intellectual property licensing or, for that matter, antitrust. Contracts, Exclusivity, and Penalty Clauses The authors’ analysis of contractual penalty clauses involves a scenario in which there is a single seller and a single buyer -perhaps a licensor and licensee of intellectual property -who enter into an initial contract before the arrival of an entrant. As is typical in this setting, the buyer and seller have an incentive to promote their own welfare at the expense of the entrant. This can be accomplished by provisions that penalize the buyer for subsequent dealing with the entrant. In their model, there is no ex post inefficiency, because if dealing with the entrant is efficient, it is assumed that the original contract will always be renegotiated to allow such dealing to take place in whatever manner is optimal. The extraction of rent from the entrant is, however, important for the efficiency of ex ante investments by each of the parties. For example (and perhaps of greatest relevance for antitrust policy), a prospective entrant may invest less in