Collusive Bidding, Competition Law, and Welfare

Abstract We explain why competing firms form collective entities to buy patents from other entities, particularly from non-practicing entities (NPEs), and follow a catch and release patent strategy. We show why having competitors bid as a single unit is better than having competitors bid against each other. More important, we show that collusive bidding on patents held by NPEs, even when the patents are not essential for a standard (SEPs), may increase consumer surplus, particularly when technological innovation is drastic, and improve social welfare. This provides a theoretical foundation that explains why competition authorities often allow collusive bidding for patents and why courts employ the “rule of reason” to analyze agreements under competition law. We also show that a cartel of incumbents will always outbid a potential entrant, or a patent assertion entity, over a technology that can destroy the value of the incumbents’ existing assets.