Patent Antitrust Equilibrium - A Quintessential Type 1 Error

In their simplest forms, patent and antitrust laws seek to promote consumer welfare in very different and seemingly contradictory ways. If the patent is valid and was issued by the patent office in the absence of fraud, the owner of the patent is granted a monopoly for the product or process described in the patent application.

A valid, enforceable patent provides its owner with the right to exclude or limit others from practicing the patented property for a defined period of time. The aim of this exclusionary right is to promote inventive activity, and the very right itself is allowed for in the U.S. Constitution.¹ The patent owner is not required to practice or license the patent and can license the patent exclusively or to any number of licensees it chooses. The license can be for any duration the owner desires, place limitations on the licensee’s use of the patent, and require the licensee to grant back any improvements the licensee adds to the patent. Most important, the patent holder can charge a buyer or licensee the market clearing price that for monopolists is the reservation price for the outright sale of the patent or the patent license.