Licensing Probabilistic Patents and Liability Rules: The Duopoly Case

Vargas Barrenechea, Martin (2008): Licensing Probabilistic Patents and Liability Rules: The Duopoly Case. Unpublished.

Abstract

In this paper a dynamic game is used to compare licensing of a cost reduction innovations under lost profits (LP) and unjust enrichment (UE), both damage rules used by courts in the calculation of damages when a patent has been infringed.

The innovation, whose property right belongs to a firm (patent holder) has a positive probability to be declared invalid in a court. The market is composed by two homogeneous firms that compete in quantities (Cournot).

Licensing by using royalty rates is preferred compared with fixed fees, it is observable little licensing (just big innovations).

LP is not always better or worst than UE, but the major of the cases consumers and society are better off under UE and in the major of cases LP benefits more to the patent holder.

• Item Type: MPRA Paper
• Language: English
• Keywords: Patents; innovation economics; probabilistic property rights; damage rules
• Subjects: L - Industrial Organization > L0 - General; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law; O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development

References

[1] J.J. Anton and D.A. Yao. Finding” Lost” Profits: An Equilibrium Analysis of Patent Infringe- ment Damages. Journal of Law, Economics, and Organization, 23(1):186, 2007.

[2] J.P. Choi. How Reasonable is the Reasonable Royalty Rate? Damage Rules and Probabilistic Intellectual Property Rights. Technical report, Michigan StateWorking Paper (February 2006).

[3] J. Farrell and C. Shapiro. How Strong Are Weak Patents? American Economics Review, forthcoming.

[4] M.I. Kamien and Y. Tauman. Patent Licensing: The Inside Story. The Manchester School, 70(1):7–15, 2002.

[5] M. Schankerman and S. Scotchmer. Damages and Injunctions in Protecting Intellectual Property. The RAND Journal of Economics, 32(1):199–220, 2001.

[6] D. Sen and Y. Tauman. General licensing schemes for a cost-reducing innovation. Games and Economic Behavior, 59(1):163–186, 2007.

[7] X.H. Wang. Fee versus royalty licensing in a Cournot duopoly model. Economics Letters, 60(1):55–62, 1998.