Holdup theory relies on fallacies – firms adapt, and they can’t be charged more than once – holdup models don’t account for this

The conflation of holdup and market power leads to three fallacies that underpin patent-holdup theory. Once the mechanics of holdup are loosened from their moorings in economic theory, it becomes possible to simultaneously claim that patent holdup is a variant of holdup as it is understood in mainstream economics and define it in ways that are inconsistent with the meaning of holdup as it is understood in mainstream economics. Patent holdup elides key assumptions of the standard theory and transforms necessary conditions for holdup into sufficient conditions for holdup. The implications are fundamental. In the established theory, firms—working together—will make structural, contractual, and behavioral adaptations in order to prevent holdup, thereby sustaining trade and investment in equilibrium. In patent-holdup theory, by contrast, firms cannot adapt and solve the problem wrought by opportunistic renegotiation of a contract, because the game begins after the R&D is completed and manufacturers invest. Adaptations to prevent holdup are ruled out by construction, and market failure is inevitable.

The conflation of holdup and market power leads to a second fallacy. Patent-holdup theory claims that the same manufacturing firms can be held up many times over, resulting in a phenomenon called royalty stacking. In point of fact, however, holdup cannot occur many times over to the same firm. A firm's quasi rents (the difference between its revenues and its short-run costs) can be extracted only once. Any attempt to extract more revenues would cause the firm to shut down. Royalty stacking, by contrast, is about the exercise of market power by multiple input suppliers to downstream firms. Although this multiplicity of input suppliers might be an inefficient organization of a market, it nonetheless can be a long-run equilibrium, unlike holdup.