Distribution, Competition, and Antitrust / IP Law

Patent Tying: Does Price Discrimination Promote Innovation?

Christopher Leslie has a thoughtful article in this month’s issue of the Antitrust Law Journal entitled “Patent Tying, Price Discrimination, and Innovation.”  I thought I would take a post or two to riff on a few of the ideas presented.

Patents, of course, give their owners certain exclusive rights.  These are thought to foster innovation by allowing firms to recoup their R&D costs.  Absent patents, other firms would free ride on innovators’ efforts, which would reduce the incentive to innovate in the first place.

But patents also create inefficiencies.  Patent owners will likely price their patented products at higher price points.  Some consumers, who would have purchased a product at the competitive price (because they value the product more than it costs at the competitive price), will not buy the higher-priced patented product.  Rivals cannot meet this demand because of the patent.  And so the overall economic system suffers a deadweight loss or inefficiency.

Some commentators have proposed that price discrimination in a tied, metered product is appropriate, efficiency-enhancing, and an antitrust defense to a patented product tie.  Here’s the argument: suppose a manufacturer receives a patent on a sophisticated new type of color copier – one that performs functions no other copiers can perform.  The manufacturer could price its product at a premium, but then some customers who would otherwise buy it will be priced out of the market.  So the manufacturer engages in “metered tying” – it will sell the copier at a lower price point, but only to those customers who buy special, non-patented paper from the manufacturer.  The manufacturer charges for the paper by the page, so that customers who use more paper pay more.  This type of metered tying accomplishes price discrimination – those customers who want the patented product more will pay more for it through the metering.  If the metering is perfectly calibrated, the manufacturer may be able to capture – and thereby eliminate – the entire deadweight loss.

This sort of patent tying may (and often does) violate the patent laws and constitute patent misuse.  But the question is, should there be a special rule for antitrust purposes – should price discrimination through metered tying be allowable under the Sherman and Clayton Acts?

Leslie outlines the arguments that have been advanced in favor of such a defense.  Metered tying rewards past innovation and promotes future innovation.  Also, in the view of some, patentees can price discriminate as to patented products themselves, and so should be able to discriminate as to tied products.  In other words, price discrimination as to tied products is an exercise of the power inherent in the patent grant, not an extension of that power.

There are, of course, responses to these arguments.  I’ll summarize those in the next post.

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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