Regulatory Monopoly and Differential Pricing in the Market for Patents

Table of ContentsI. Introduction 1857II. Regulatory Monopolies and Differential Pricing 1863A. The Concept of a Regulatory Monopoly 1863B. Other Regulatory Market Structures 1865C. The Economics of Differential Pricing 18681. Prerequisites for Differential Pricing 18692. Varieties of Differential Pricing 1873D. Differential Pricing in Regulatory Monopolies 1875III. The Promise of Differential Pricing in the Marketfor Patents 1877A. The Pricing of Patents 1877B. The Effect of Patent Prices on Innovation 1882C. Third-Degree Price Discrimination in the Market for Patents 1886D. Differential Pricing to Incentivize Innovation 1890E. Differential Pricing to Limit Patent Term 18931. The Rationale for Tailoring Term for Different Industries 18932. Differentially Raising Maintenance Fees to Limit Term 1896IV. The Empirical Basis for Differential Patent Pricing 1899A. Measuring How Much Patents MatterAcross Industries 19001. Patent Applicant Behavior Post-TRIPS 19022. Maintenance Fee Measure 19063. Industry-Level PTO Costs 1908B. Generating Differential Patent Prices 1910V. The Legal Basis for Differential Patent Pricing 1913A. The America Invents Act and the PTO's Fee-Setting Authority 1913B. Differential Patent Pricing Under the AIA 1916VI. Conclusion 1919VII. Appendix 1921I. IntroductionPatent law is inextricably tied to the economics of monopolies, as patents are legal monopolies awarded to inventors to incentivize innovation.1 By allowing an inventor to exclude others from making, using, or selling his invention for a limited period of time,2 patent law encourages the inventor to spend the fixed costs necessary to generate the invention in the first place. Unfortunately, patents often allow inventors to set higher prices than would otherwise exist in a competitive market. This tradeoff between incentivizing innovation and allowing monopoly pricing is a fundamental and contentious topic debated by patent scholars.3Despite the centrality of monopoly to patent law, scholars have largely overlooked another crucial role that monopoly plays in the patenting process. This Article addresses that situation by explaining how the U.S. Patent and Trademark Office (PTO)-which is the sole regulatory entity charged with awarding patents in the United States-has a monopoly over the granting of patent rights.4 If patents are viewed as products in a market, then the PTO is the only place where they can be obtained. And to receive patent protection, patent applicants and patentees must pay the fees the PTO charges to fund its operations.5More generally, this Article develops the concept of a regulatory monopoly, where a single governmental actor has the power to set prices in a regulatory area. The PTO is a paradigmatic example of such a monopolist.6 It exercises its regulatory monopoly powers when it mandates payments such as maintenance fees, which are periodic payments a patentee must make to prevent an already-issued patent from lapsing.7 The Article discusses in detail the operation of the PTO and highlights other regulatory monopolies at the federal, state, and local levels.Like a traditional monopolist, a regulatory monopolist can engage in differential pricing by charging different amounts to different people depending on how much they are willing to pay and how much it costs to serve them.8 Unlike a traditional monopolist, however, a regulatory monopolist ideally uses differential pricing to further the public good. This Article explains the prerequisites for differential pricing and discusses how regulatory monopolists can use such pricing to better fulfill their regulatory goals. …