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Optimal Licensing of Uncertain Patents in the Shadow of Litigation

Author

Listed:
  • Rabah Amir

    (University of Arizona)

  • David Encaoua

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Yassine Lefouili

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

Abstract
The paper investigates the choice of a licensing mechanism by the holder of a patent whose validity may be challenged. Focusing fi rst on weak patents, i.e. patents that have a high probability of being invalidated by a court if challenged, we show that the patent holder fi nds it optimal to use a per-unit royalty contract if the strategic effect of an increase in a potential licensee's unit cost on the equilibrium industry profi t is positive. The latter condition ensures the superiority of the per-unit royalty mechanism independently of whether the patent holder is an industry insider or outsider, and is shown to hold in a Cournot (resp. Bertrand) oligopoly with homogeneous (resp. differentiated) products under general assumptions on the demands faced by fi rms. We then examine the optimal licensing of patents that are uncertain but not necessarily weak. As a byproduct of our analysis, we contribute to the oligopoly literature by offering some new insights of independent interest regarding the effects of cost variations on Cournot and Bertrand equilibria.

Suggested Citation

  • Rabah Amir & David Encaoua & Yassine Lefouili, 2013. "Optimal Licensing of Uncertain Patents in the Shadow of Litigation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00847955, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00847955
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00847955
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    References listed on IDEAS

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    3. Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2018. "Optimal licensing under incomplete information: the case of the inside patent holder," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(4), pages 979-1005, December.
    4. Doh‐Shin Jeon & Yassine Lefouili, 2018. "Cross‐licensing and competition," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 656-671, September.
    5. Apurva Dey & Arun Kaushik & Rupayan Pal, 2017. "Probabilistic Patents, Alternative Damage Rules and Optimal Trade Policy," Working Papers id:11748, eSocialSciences.
    6. Zhang, Huaige & Wang, Xuejun & Qing, Ping & Hong, Xianpei, 2016. "Optimal licensing of uncertain patents in a differentiated Stackelberg duopolistic competition market," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 215-229.
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    8. Dirk Dohse & Rajeev K. Goel & James W. Saunoris, 2023. "Patenting uncertainty and its impact on innovation: evidence from the United States," The Journal of Technology Transfer, Springer, vol. 48(5), pages 1839-1859, October.
    9. Wang, Kuang-Cheng Andy & Wang, Yi-Jie & Liang, Wen-Jung & Tsai, Ming-Che & Mai, Chao-Cheng, 2016. "Patent licensing under financial structure with limited liability," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 121-135.
    10. Leonard F. S. Wang & Arijit Mukherjee & Chenhang Zeng, 2020. "Does technology licensing matter for privatization?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1462-1480, September.
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    13. Jacob Seifert, 2015. "Welfare effects of compulsory licensing," Journal of Regulatory Economics, Springer, vol. 48(3), pages 317-350, December.
    14. Tsung-Sheng Tsai & Cheng-Tai Wu, 2022. "Optimal licensing contracts with a downstream oligopoly: insider versus outsider innovation," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 147-165, May.
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    More about this item

    Keywords

    Cost comparative statics; Licensing mechanisms; Uncertain patents; Patent litigation; Cost comparative statics.; Mécanismes de licence; Brevets incertains; Litige en brevet; Statique comparative des coûts;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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