Price Discrimination and Patent Policy

Patent and antitrust policy are often presumed to be in conflict. As an important example, there is ongoing controversy about whether price discrimination by a patent holder is an illegal or socially undesirable exploitation of monopoly power. In this article we show that no conflict exists in many price discrimination cases. Even ignoring the (dynamic) effects on incentives for innovation, third-degree price discrimination by patent holders can raise (static) social welfare. In fact, Pareto improvements may well occur. Welfare gains occur because price discrimination allows patent holders to open new markets and to achieve economies of scale or learning. Further, even in cases where discrimination incurs static welfare losses, it may be efficient relative to other mechanisms, such as length of patent life, for rewarding innovators with profits.