Abstract

Conventional wisdom perceives patent protection as a necessary evil. Patent protection, the argument goes, raises the prices of patented products and processes, thus restricting access to innovation. But without it, not enough innovation will be produced. Hence, generations of scholars have sought ways to curb the market power of patentees via various legal interventions, such as prizes, compulsory licenses, and other forms of regulation. All have tacitly assumed that eroding the market power of patentees would result in a competitive market for innovation that would put an end to the allocative inefficiencies and distributional inequities that emanate from patent protection.

The present Article sets out to challenge the accepted understanding of innovation, showing that patentholders ordinarily operate in markets of monopsonistic nature, namely, markets characterized by a single purchaser or a highly concentrated demand side. Crucially, this finding involves the most prominent patent-inhabiting industries, including pharmaceuticals, agriculture and biotechnologies, defense technologies, infrastructural equipment and other sectors. The existence of monopsonies in markets for patented technologies implies that commentators have thus far overlooked the actual structure of the marketplace for patents, which routinely features a bilateral monopoly: a single seller along with a single buyer. After highlighting this phenomenon and assessing its pervasiveness, this Article introduces a blueprint for analyzing patent monopsonies. It shows that under extant market structure, the monopsonistic counterforces may reinstate competitive pricing of inventions, whereas in other cases, the presence of patent monopsonies might prove disadvantageous to society at large.

The new market picture this Article portrays gives rise to several important policy implications. First, it shows that the high prices consumers pay in some industrial sectors are due to the existence of monopsonies, not patents. Second, in contrast with conventional wisdom, it counsels against the use of compulsory licenses in monopsonistic industries because they reduce innovation without generating any real benefits to consumers. Third, it demonstrates that the existence of monopsonies is a core reason for suppression, non-commercialization, and distortion of innovation. It also discusses legal interventions that can help alleviate this problem.

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