This debate echoes in the policy world. For instance, in August 2023, President Joe Biden implicitly took the “too strong” side on drug patents when he declared, “We are going to stand up to Big Pharma,” as his administration introduced the first set of prescription drugs targeted for Medicare price negotiation under the Inflation Reduction Act. The listed drugs are used to treat conditions such as diabetes, heart failure, and blood clots, generating billions in annual revenue. Manufacturers such as Merck, Bristol Myers Squibb, and Johnson & Johnson were told: Negotiate or lose access to Medicare’s market altogether. That announcement drew immediate political and legal criticism, including arguments that Medicare won’t properly compensate drug patentholders for their research and development costs.

Shifting from Monopolists to Monopsonists

Beyond the Biden Medicare headlines lay a deeper—and largely overlooked—economic truth: Medicare’s ability to compel negotiation is not an exception. It reflects a fundamental feature of markets in which patented inventions are sold. Patentholders are routinely portrayed by economic theorists and intellectual property scholars as monopolists selling at inflated prices. Yet, in many patent-inhabiting industries, inventors frequently confront a single buyer or a highly concentrated demand side that wields market power over prices, access, and innovation incentives. Indeed, a dominant market failure in many innovation markets is not only the deadweight loss purportedly attributable to monopolistic patentholders, but the market power of a strong procurer. In economic terms, patent-intensive markets are often characterized by bilateral monopolies, featuring one seller, one buyer, and no clear prediction as to the resulting price in the negotiations between them.

This market structure goes beyond pharmaceuticals—where Medicare and Medicaid wield control over a massive share of demand—to include the defense sector, infrastructure, aviation, and a wealth of other patent-intensive sectors. Yet, patent law—and much of the policy built around it—is predicated on a very different premise, assuming a world in which patentholders have inordinate market power and leverage it to their advantage at the expense of consumers. We contend that the conventional paradigm does not accurately capture the reality of myriad innovation markets, where a concentrated demand side leads to insufficient commercialization, distorted selection of technologies, and underinvestment in R&D. Accordingly, the most prominent policy instruments originally employed to alleviate the economic burdens of patent monopolization—such as compulsory licenses or price caps—may in fact exacerbate rather than eliminate the market failures.

When Patentholders Confront a Monopsonist

The classic economic critique directed against the patent system is straightforward: A patent confers market exclusivity, thus allowing the inventor to charge a price beyond the one set in a competitive equilibrium. Monopolistic pricing restricts access, transfers wealth from consumers to patentholders, and results in deadweight loss. The resulting allocative inefficiencies and distributional inequities are the quintessential “price” society pays to incentivize innovation.

This textbook story rests on one core premise: The demand side is competitive. But what if this premise is incorrect? The presence of a monopsony or an oligopsony—one or a few buyers that dominate the market—might fundamentally alter the way we perceive patents and change our innovation policy. In markets that feature such a bilateral monopoly, neither side can unilaterally dictate prices and quantities. Ultimately, the result would depend on bargaining dynamics, specifically on the presence of alternatives and outside options. In practice, this implies that the buyer may often hold the upper hand; after all, while the seller’s market power is rooted in legal exclusivity, the buyer’s power originates from its institutional or political strength. Consumers in such industries will continue paying supra-competitive prices even if patents did not exist. Doing away with patent protection will not affect the prices charged to consumers, but it will make innovation disappear.

There is no shortage of examples. Begin with the pharmaceutical sector. Patent drug makers are typically viewed as textbook monopolists, but the actual structure of the market widely diverges from conventional wisdom. Medicare and Medicaid account for a substantial share of US drug spending and procurance. Through tools like formularies and tiered pricing, the US and state governments exerted considerable leverage over pricing well before the formal Medicare negotiation mechanisms were introduced. As a matter of fact, all the Inflation Reduction Act of 2022 did was make this dynamic explicit at the federal level, authorizing direct negotiations over the prices of high-expenditure drugs. This signals a shift from reactive reimbursement into proactive price-setting. Despite threatening litigation, manufacturers have come to the negotiations table—they have no choice.

Thus, treating the pharmaceutical market as monopolistic is inaccurate at best and utterly mistaken at worst. Stating that patentholders have complete control over pricing misdescribes the actual dynamics of price formation in sectors where the buyer enjoys substantial market power.

Next, consider the defense industry. The federal government is often the sole customer for weapon systems, cybersecurity solutions, and various space technologies. Many of these inventions are patented, but this matters little when there is only one relevant buyer. And not only does this buyer possess the unique purchasing ability; it is also the regulator of the realm. In addition to the Defense Department’s ability to determine what to buy and at what price, it can restrict resale, limit foreign licensing, and classify technologies to prevent disclosure. These powers far outweigh the power of patentees.

Perhaps even more striking is the fact that the US government openly acknowledges its monopsony power when it comes to defense technology. In a 2022 report, the Defense Department emphasized the need to manage intellectual property strategically, warning that contractors must accept limits on pricing and licensing if they wish to participate in procurement. Bluntly put, the government sets the rules of the game; patentholders may choose between playing along or not playing at all.

A similar pattern exists in infrastructure and energy. Governments at various levels often act as the only meaningful buyers of patented systems used in road construction, traffic management, and power distribution. Even when procurement is decentralized, public tender rules and performance specifications effectively limit the pool of acceptable technologies.

Likewise, regulated utilities—especially in electricity markets—can operate as local monopsonists. Independent power producers that rely on patented innovations in energy storage or smart grid technologies typically have only one buyer in their service territory. And that buyer, protected by franchise and regulatory insulation, has little incentive to pay high prices for cutting-edge solutions. So even where the law allows innovation, the market may fail to reward it.

As a final example, take aviation technology. The commercial aviation market is often portrayed as a classic duopoly consisting of Boeing and Airbus. But upstream, the innovation ecosystem is vast and abundant with patents. Startups and specialized suppliers produce everything from aerodynamic components to cockpit software, often protected by voluminous patent portfolios. Those suppliers typically confront only two relevant customers. Long-term exclusive contracts, proprietary integration standards, and reputational barriers mean that even superior patented solutions may go unused if they fail to align with buyer standards and preferences. The result is again winnowing of the innovation funnel, where only a few firms—those who meet incumbent buyers’ conditions—can succeed.

Policy Implications

Rethinking the monopoly narrative is not a mere academic exercise; it might be a legal imperative. Those and other examples point to a profound mismatch between the realities of innovation markets and the assumptions underlying not only decades of patent scholarship but also public policy. It might only be a slight exaggeration to say that the entirety of patent policy is predicated on the premise that patentees are price-makers. Yet, in a concentrated demand environment, it may be more appropriate to describe them as price-takers. If so, patent protection is not constitutive to exploitation, but rather the only lever inventors have to negotiate fair compensation.

This understanding offers many important policy insights. To name just a few:

• Compulsory licenses: In markets where the buyer already has disproportionate leverage, capping the patentholder’s recovery—the subject of many policy papers that call for the adoption of compulsory licenses for patented technologies—merely entrenches buyer dominance. Instead of protecting consumers, it may deter future R&D.
• Inventor incentives: If a patentee must sell to a single buyer, and that buyer declines to adopt the technology, the invention obviously stalls. The patent system cannot overcome demand-side bottlenecks.
• Cumulative innovation: Cumulative innovation thrives in markets where multiple players adopt and adapt technologies. But in monopsonistic sectors, where only one design wins procurement, the incentive for others to improve or iterate collapses.
• Regulation and policymaking: If the goal is to improve access, pricing, and innovation outcomes, then breaking up or regulating demand-side power may sometimes be more effective than undermining patent rights.

Policymakers thus need to distinguish between patent-induced monopoly and monopsony-induced stagnation. In competitive markets, patents can indeed increase prices and restrict access; conventional wisdom is conventional for a reason. But in monopsonistic markets, patents may be necessary just to sustain innovation.

Rather than thinking about patent-inhabiting markets monolithically, regulators should evaluate patent rules in light of the underlying industry structure. In some sectors, compulsory licensing may well be justified to curb abuse. In others, particularly those where the government or a handful of firms dominate demand, reinforcing patent rights may be necessary to prevent innovation from drying up. Moreover, government entities that act as monopsonists should take active steps to mitigate the innovation-suppressing effects of their own power. This could include funding multiple competing technologies in parallel, making procurement criteria more transparent and performance-based, supporting interoperability standards to prevent lock-in, or establishing public options that create demand-side competition.

Conclusion

It is undeniable that patent law relies on exclusivity to spur innovation. The promise (or expectation) of exclusivity leads inventors to invest in the planning and production of new goods and processes. It is common to assume automatically that the same exclusivity is the cause of the high prices that consumers pay for patented products and processes. This assumption leads academics and policymakers to come up with various proposals whose goal is to curb the market power of patentees in order to ensure a fairer and more equitable distribution of patented innovation throughout our society. We argue that standard theorizing ignores a critical feature of innovation markets: a highly concentrated and powerful demand side.

If innovation policy purports to remain effective, it must account for this phenomenon. Monopsony, not monopoly, is often the greater threat to dynamic markets. These powerful buyers of innovation will turn around and sell innovative products and processes—indeed, all products and processes—to the public at supra-competitive prices, irrespective of patent protection. In such cases, weakening patent protection may do more harm than good, as it will suppress innovation without any offsetting benefits to the public.

Readings

• Barnett, Jonathan M., 2025, “The Perils of ‘Free’ Information,” Regulation 48(1): 36–43.
• Levine, David K., 2025, “Freedom Isn’t the Same as Free Beer,” Regulation 48(2): 2–3.
• McDaniel, Christine, 2025, “Answering Barnett’s Libertarian Critics,” Regulation 48(2): 3–4.