The counterplan solves and competes---the plan is banned to prevent the monopolization of upstream tech, extending DOJ antitrust enforcement to the plan area to incent innovation.

How does antitrust law enforcement against the anticompetitive effect of a firm’s consolidation of patents shape innovation? This inquiry is at the crossroads of the antitrust and patent policy domains; thus, the answer is deemed crucial to a comprehensive understanding of how interactions between the two institutions shape innovation. However, existing studies seem to have provided only clues and limitations. Whether a stronger market competition drives innovation (Aghion et al., 2005; Arrow, 1962; Schumpeter, 1942) remains unclear. Meanwhile, there has been a sharp scholarly disagreement with mixed empirical findings on whether stronger patent protection promotes innovation (Hall and Ziedonis, 2001; Kortum and Lerner, 1997; Sakakibara and Branstetter, 2001). In antitrust law scholarship, questions about antitrust law’s relation to innovation (Khan, 2016), and the conditions under which the enforcement of antitrust laws shape market competition and innovation have drawn scholarly attention but with limited empirical evidence (Katz and Shelanski, 2005; Sidak and Teece, 2009). The present study explores a part of the answers to the foregoing question by examining the effect of antitrust regulation of patent consolidations on the creation of follow-on innovations. Firms can consolidate patents in two ways: (1) preemptive patenting through internal research and development (R&D) and A (2) purchasing existing patents (i.e., patent transfers). Preemptive patenting helps dominant players maintain their monopolistic market power (Gilbert and Newbery, 1982); this does not violate antitrust law (see, Gilbert, 1987). Meanwhile, patent consolidation by patent transfer can restrict access to upstream technology (Figueroa and Serrano, 2019; Hahn, 1984) by downstream innovators and deter their market entry (Gotts and Sher, 2012; Ziedonis, 2004); such consolidations may violate antitrust law. The latter case is the scope of this study. By reconciling the literature on patent pools and the role of patents in cumulative innovation, we hypothesize the negative effect of a firm’s patent consolidation on its competitors’ follow-on innovations and market competition in a sector where innovation is created in a highly cumulative manner. This holds if the patent-consolidating firm amasses patents for upstream technologies that are substitutes for technologies it already owns. In that case, antitrust regulation of patent consolidation is anticipated to positively affect the creation of follow-on innovations by the patent-consolidating firm’s competitors. We empirically test this hypothesis by analyzing the intervention by the US Department of Justice (DOJ) in transfers of Linux-related patents by Novell—an open-source software (OSS) company—to a consortium of four large proprietary software companies in 2011. The consortium, which comprises Microsoft (MS), Oracle, EMC, and Apple, was known as CPTN Holdings (CPTN). Because Novell’s patents were crucial to Linux software development, while the patent-consolidating firms’ products were in fierce market competition with the Linux-based software, the patent transfers could discourage software market competition. The DOJ intervened in response to antitrust concerns about this patent transfer deal. The intervention was intended to regulate the transfer of patents to MS rather than banning the entire patent transfer. Some Novell patents could (or could not) be transferred to the other three software companies (i.e., Oracle, EMC, and Apple) because of this partial regulation. By exploiting the fact that DOJ intervention was triggered by details of the patent transfer deal that were disclosed by the German federal antitrust authority, we identify the causal impact of the regulation of patent transfers. Our analyses using patent citation, copyright, and trademark data show the positive effect of the antitrust regulation of Novell’s patent transfers on the development of follow-on innovations by the patent-consolidating firms’ competitors. By empirically examining how antitrust regulation of patent-enabled monopolies affects follow-on innovations, this study advances the broad policy discussion on interactions between antitrust and patent laws become relevant to innovation. As intensively discussed by scholars (Katz and Shelanski, 2005; Sidak and Teece, 2009), the necessity of incorporating “technological innovation” into modern antitrust law by accounting for the Schumpeterian perspective has received increasing recognition from the antitrust law community. The Schumpeterian view posits that market competition and technological innovation are mutually and dynamically influenced in the so-called “innovation cycle.” Firms that are not dominant market players may enjoy monopolistic market profits through future innovation. In contrast, a dominant market player may lose its monopolistic market position due to a competitor’s innovation. The dynamics create therein incentives for firms to innovate. This scholarship leads to the important question of how antitrust law jointly shapes market competition and innovation. Our study contributes to this discussion by empirically showing that “patent consolidation” by firms is a venue where enforcement of antitrust law promotes market competition and technological innovation. The remainder of this paper is structured as follows. Section 2 reviews the literature on patent pools and cumulative innovation to derive our main hypothesis. Section 3 describes the data and methods for empirical analysis. Section 4 presents the findings, and Section 5 discusses the implications.