Instituto de Economía

Abstract:
Patent settlements between rivals must necessarily restrain competition to some extent, but antitrust has not yet developed a clear set of boundaries on what is allowed. Further complicating matters, these settlements forestall a ruling on whether the patent is valid and enforceable. Ideally antitrust would engender “proportionality” between patent quality (the likelihood of validity) and the extent to which competition is diminished. We show that antitrust can accomplish this by simply policing the particular manner in which competition is restrained—i.e. the type of restraint being used—and by prohibiting certain side-deals designed to subvert proportionality (such as reverse payments). We show that different restraints vary considerably in the extent to which bargaining outcomes line up with the expected result of litigation. This allows us to infer the degree of proportionality from the type of restraint being used, making it unnecessary to estimate patent quality or price effects.