Standard Setting, Patents, and Hold-Up

John Farrell, Professor of Economics, University of California at Berkeley, and a Senior Consultant at CRA International, John Hayes, Vice President at CRA International, Carl Shapiro, Transamerica Professor of Business Strategy at the Haas School of Business at the University of California at Berkeley and a Senior Consultant at CRA International, and Theresa Sullivan, Senior Vice President at Competition Policy Associates

12/20/2007
(Original Publish Date: 12/1/2007)

Standard setting raises a variety of antitrust issues. Cooperative standard setting often involves horizontal competitors agreeing on certain specifications of the products they plan to market, implicating core antitrust issues regarding the boundary between cooperation and collusion. The American Bar Association’s Handbook on the Antitrust Aspects of Standards Setting presents legal analysis of many such issues. Shapiro and Varian discuss business strategy in standard setting, and Shapiro addresses the boundary between cooperative standard setting and collusion. This article focuses on a problem that the ABA Handbook labels “patent ambush” and that economists call “opportunism” or “hold-up.” In very broad terms, opportunism or hold-up arises when a gap between economic commitments and subsequent commercial negotiations enables one party to capture part of the fruits of another’s investment, broadly construed. Hold-up can arise, in particular, when one party makes investments specific to a relationship before all the terms and conditions of the relationship are agreed.