No incentives for patent holdup – patent holders want their products to be licensed out of self interest, and alternatives will always exist that weaken leverage

Another common criticism of patents based on the “rewards” view is that patents restrict innovation by discouraging the use of patented inventions. According to this argument, patent owners can “hold up” infringers by threatening injunctions and damage remedies for infringement.157 Infringers are said to be unaware of the patents and surprised by legal claims. The “hold-up” argument further assumes that infringers are locked in to the technology because of high costs of designing around the patented technology and the costs of switching to a new technology. The “hold-up” argument concludes that patent owners will take advantage of these costs to increase royalty demands in license negotiations.

The theoretical “hold-up” argument tends to ignore incentives for coordination through the market for inventions.158 Patent owners and producers have incentives to contract before any infringement occurs and before producers make complementary investments. Evidence for this comes from extensive investment and industry growth that occurs after licensing and cross-licensing of inventions.

Even after infringement is discovered, patent owners and producers have incentives to negotiate licensing agreements. Patent owners do not have incentives to seek excessive royalties because they benefit from producers’ marketing and sales efforts that increase usage of the patented invention. Patent owners also benefit from producers’ making investments in new products, production processes, and transaction techniques that apply the inventions. Patent owners would not wish to discourage investments in innovation and complementary assets. Also, in practice, producers can develop alternative technologies, license substitute technologies, or pursue alternative activities that do not require the infringed technology. These activities are affected by royalties; excessive royalties would discourage use of the patented invention and encourage the search for alternatives. Market forces including competition from past, present, and future inventions constrain royalties.