IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v98y2008i4p1347-69.html
   My bibliography  Save this article

How Strong Are Weak Patents?

Author

Listed:
  • Joseph Farrell
  • Carl Shapiro

Abstract

We study the welfare economics of probabilistic patents that are licensed without a full determination of validity. We examine the social value of instead determining patent validity before licensing to downstream technology users, in terms of deadweight loss (ex post) and innovation incentives (ex ante). We relate the value of such pre-licensing review to the patent's strength, i.e., the probability it would hold up in court, and to the per-unit royalty at which it would be licensed. We then apply these results using a game-theoretic model of licensing to downstream oligopolists, in which we show that determining patent validity prior to licensing is socially beneficial. (JEL D82, K11, L24, O34 )

Suggested Citation

  • Joseph Farrell & Carl Shapiro, 2008. "How Strong Are Weak Patents?," American Economic Review, American Economic Association, vol. 98(4), pages 1347-1369, September.
    • Handle: RePEc:aea:aecrev:v:98:y:2008:i:4:p:1347-69
    Note: DOI: 10.1257/aer.98.4.1347
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.4.1347
    Download Restriction: no
    File URL: http://www.aeaweb.org/aer/data/sept08/20051051_app.pdf
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 567-589.
    2. Shapiro, Carl, 2003. "Antitrust Limits to Patent Settlements," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 391-411, Summer.
    3. Benjamin Chiao & Josh Lerner & Jean Tirole, 2007. "The rules of standard-setting organizations: an empirical analysis," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 905-930, December.
    4. Bharat N. Anand & Tarun Khanna, 2000. "The Structure of Licensing Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 103-135, March.
    5. repec:bla:jindec:v:48:y:2000:i:1:p:103-35 is not listed on IDEAS
    6. Reiko Aoki & Jin‐Li Hu, 1999. "Licensing vs. Litigation: The Effect of the Legal System on Incentives to Innovate," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 133-160, March.
    7. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
    8. Jay Pil Choi, 2005. "Live and Let Live: A Tale of Weak Patents," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 724-733, 04/05.
    9. Chun‐Hsiung Liao & Debapriya Sen, 2005. "Subsidy In Licensing: Optimality And Welfare Implications," Manchester School, University of Manchester, vol. 73(3), pages 281-299, June.
    10. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 337-388.
    11. Choi, Jay Pil, 1998. "Patent Litigation as an Information-Transmission Mechanism," American Economic Review, American Economic Association, vol. 88(5), pages 1249-1263, December.
    12. Michael J. Meurer, 1989. "The Settlement of Patent Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 77-91, Spring.
    13. Patrick Rey & Thibaud Vergé, 2004. "Bilateral Control with Vertical Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 728-746, Winter.
    14. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
    15. Waterson, Michael, 1990. "The Economics of Product Patents," American Economic Review, American Economic Association, vol. 80(4), pages 860-869, September.
    16. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-230, March.
    17. Marco, Alan C., 2005. "Learning by Suing: Structural Estimates of Court Errors in Patent Litigation," Vassar College Department of Economics Working Paper Series 68, Vassar College Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mitchell, Matthew & Zhang, Yuzhe, 2012. "Shared Rights and Technological Progress," MPRA Paper 36537, University Library of Munich, Germany.
    2. Aoki, R. & Spiegel, Y., 1998. "Public Disclosure of Patent Applications, R&D, and Welfare," Papers 30-98, Tel Aviv.
    3. Matthew D. Henry & John L. Turner, 2010. "Patent Damages And Spatial Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 58(2), pages 279-305, June.
    4. Llobet, Gerard, 2003. "Patent litigation when innovation is cumulative," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1135-1157, October.
    5. Kou Zonglai & Zhang Jian, 2007. "Endogenous licensing in cumulative innovation," Psychometrika, Springer;The Psychometric Society, vol. 2(3), pages 424-457, July.
    6. Rosenkranz, Stephanie & Schmitz, Patrick W., 2001. "Vertikale Unternehmenskooperationen," MPRA Paper 6930, University Library of Munich, Germany.
    7. Anne Duchêne & Konstantinos Serfes, 2012. "Patent Settlements as a Barrier to Entry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 399-429, June.
    8. Ottoz Elisabetta & Cugno Franco, 2012. "Does Banning Side Payments in Patent Settlements Suffice to Fully Protect Consumers?," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201201, University of Turin.
    9. Gerard Llobet & Javier Suarez, 2005. "Financing and the Protection of Innovators," Working Papers wp2005_0502, CEMFI.
    10. Lømo, Teis Lunde, 2015. "Risk sharing mitigates opportunism in vertical contracting," Working Papers in Economics 10/15, University of Bergen, Department of Economics.
    11. Mark Schankerman & Florian Schuett, 2022. "Patent Screening, Innovation, and Welfare," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 2101-2148.
    12. Pagnozzi, Marco & Piccolo, Salvatore & Reisinger, Markus, 2021. "Vertical contracting with endogenous market structure," Journal of Economic Theory, Elsevier, vol. 196(C).
    13. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    14. Catherine C. de Fontenay & Joshua S. Gans, 2005. "Vertical Integration in the Presence of Upstream Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 544-572, Autumn.
    15. Bakaouka, Elpiniki & Milliou, Chrysovalantou, 2018. "Vertical licensing, input pricing, and entry," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 66-96.
    16. Choi, Jay Pil, 1998. "Patent Litigation as an Information-Transmission Mechanism," American Economic Review, American Economic Association, vol. 88(5), pages 1249-1263, December.
    17. Mathias Dewatripont & Patrick Legros, 2013. "‘Essential’ Patents, FRAND Royalties and Technological Standards," Journal of Industrial Economics, Wiley Blackwell, vol. 61(4), pages 913-937, December.
    18. Miklós-Thal, Jeanine & Shaffer, Greg, 2017. "Private contracting with externalities: Divide and conquer?," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 460-472.
    19. Doh‐Shin Jeon & Yassine Lefouili, 2018. "Cross‐licensing and competition," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 656-671, September.
    20. Schuett, Florian, 2012. "Field-of-use restrictions in licensing agreements," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 403-416.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:98:y:2008:i:4:p:1347-69. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.