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An optimal rule for patent damages under sequential innovation

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  • Yongmin Chen
  • David E.M. Sappington

Abstract

We analyze the optimal design of damages for patent infringement when a follow†on innovator may infringe the patent of an initial innovator. We consider damage rules that are linear combinations of the popular “lost profit†(LP) and “unjust enrichment†(UE) rules, coupled with a lump†sum transfer between innovators. Such linear rules can sometimes induce the socially optimal levels of sequential innovation and the optimal allocation of industry output. The optimal linear rule achieves the highest welfare among all rules that ensure a balanced budget for the industry, and often secures substantially more welfare than either the LP rule or the UE rule.

Suggested Citation

  • Yongmin Chen & David E.M. Sappington, 2018. "An optimal rule for patent damages under sequential innovation," RAND Journal of Economics, RAND Corporation, vol. 49(2), pages 370-397, June.
    • Handle: RePEc:bla:randje:v:49:y:2018:i:2:p:370-397
    DOI: 10.1111/1756-2171.12229
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    Cited by:

    1. Chen, Yongmin, 2020. "Improving market performance in the digital economy," China Economic Review, Elsevier, vol. 62(C).
    2. Ganguly, Madhuparna, 2021. "Competition and Innovation: the effects of scientist mobility and stronger patent rights," MPRA Paper 107831, University Library of Munich, Germany.
    3. Turner, John L., 2018. "Input complementarity, patent trolls and unproductive entrepreneurship," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 168-203.
    4. Ganguly, Madhuparna, 2021. "Stronger Patent Regime, Innovation and Scientist Mobility," MPRA Paper 107635, University Library of Munich, Germany.
    5. Bar, Talia & Kalinowski, Jesse, 2019. "Patent validity and the timing of settlements," International Journal of Industrial Organization, Elsevier, vol. 67(C).
    6. Leiva Bertran, Fernando J. & Turner, John L., 2017. "Welfare-optimal patent royalties when imitation is costly," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 457-475.
    7. Jinglei Huang & Danxia Xie & Zhihao Xu, 2024. "Sequential innovation and contribution distribution: measurement from game live-streaming industry," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-10, December.
    8. Madhuparna Ganguly, 2020. "Stricter patent regime, scientist mobility and innovation," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-037, Indira Gandhi Institute of Development Research, Mumbai, India.

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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • K2 - Law and Economics - - Regulation and Business Law
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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