IDEAS home Printed from https://ideas.repec.org/p/ags/aaea03/22114.html
   My bibliography  Save this paper

In Search Of The Privately Optimal Patent Breadth

Author

Listed:
  • Yiannaka, Amalia
  • Fulton, Murray E.

Abstract

Innovating firms choose to patent their innovations when patenting allows the appropriation of more rents than do other forms of intellectual property protection (e.g., trade secrecy). The level of innovation rents that can be captured by the patent is mainly determined by the breadth of patent protection. Thus, once the decision to patent has been made, the innovator needs to make another important decision, namely, how broad of a patent protection to claim. While the innovator's decision to patent the innovation or to keep it a secret has been examined in the literature (Horstmann et al. 1985, Waterson 1990), there is no formal framework of analysis of the innovator's patent breadth choice. Instead, the traditional assumption in the economic literature is that the innovator has an incentive to claim 'as much as possible'. The effectiveness of this strategy in maximizing the rents that can be appropriated by the patentee is questionable, however. A patent that is too broad increases the likelihood of both infringement and patent validity challenges by competitors and/or third parties (Merges and Nelson 1990). Consequently, broad patent protection may reduce the effective patent life and thus the innovation rents that can be captured with the patent, since patents are often revoked during infringement trials and patent validity challenges (Merges and Nelson 1990, Barton 2000). This concern is especially critical given the increase in patent litigation during the last decade, particularly in the field of biotechnology, and the increase in the number of patents that are invalidated after being challenged. While the broadest possible patent may not be optimal, neither is a very narrow patent, since narrow patents make it easier for rivals to enter the patentee's market and may not allow the patentee to capture enough returns to cover her R&D costs. The purpose of this paper is to theoretically examine the patenting behavior of innovators that have generated patentable process innovations and have decided to seek patent protection. In specific, the paper determines the privately optimal patent breadth for process innovations when the innovator faces the probability of a direct patent validity challenge by a third party and potential entry in her market by competitors that provide technologically equivalent processes. The paper also examines the affect of patent breadth on the competitors' incentive to generate a competing process (i.e., on the competitors' R&D spending), on the competitors' probability of success in the R&D process (i.e., the patentee's ability to deter entry) and on the timing that success is realized by competitors (i.e., the pace of future innovations). The innovating firm's patent breadth decision is determined in a sequential game between an incumbent innovator who decides on the breadth of patent protection claimed and potential entrants who, having observed whether the patent was challenged or not, decide on whether to generate competing processes and how much to spend on R&D. The game is solved by backwards induction. Results show that the optimal patent breadth depends on the affect of new entry on the incumbent's profits, the incumbent's legal costs incurred when the patent is challenged and on whether the incumbent operates under a short term or a long term horizon. A key result of the paper is that, even when a patent breadth that deters entry exists, it might not be profit maximizing for the incumbent to choose this patent breadth to deter entry. As well, claiming the maximum breadth of patent protection is never an optimal strategy for the incumbent patentee in this model. The analysis shows that the nature of the instantaneous probability of success is a critical factor in determining the optimal patent breadth as well as the affect of patent breadth on the rivals' R&D spending, the probability of success by rivals and the timing that success occurs.

Suggested Citation

  • Yiannaka, Amalia & Fulton, Murray E., 2003. "In Search Of The Privately Optimal Patent Breadth," 2003 Annual meeting, July 27-30, Montreal, Canada 22114, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea03:22114
    DOI: 10.22004/ag.econ.22114
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/22114/files/sp03yi01.pdf
    Download Restriction: no

    File URL: https://libkey.io/10.22004/ag.econ.22114?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Lanjouw, Jean O & Schankerman, Mark, 2001. "Characteristics of Patent Litigation: A Window on Competition," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 129-151, Spring.
    2. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-748, September.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    4. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 429-436.
    5. Horstmann, Ignatius & MacDonald, Glenn M & Slivinski, Alan, 1985. "Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 837-858, October.
    6. Harhoff, Dietmar & Reitzig, Markus, 2004. "Determinants of opposition against EPO patent grants--the case of biotechnology and pharmaceuticals," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 443-480, April.
    7. Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 395-410.
    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. Amalia Yiannaka, 2009. "When Less Is More: Optimal Patent Breadth under the Threat of Patent Validity Challenges," Southern Economic Journal, John Wiley & Sons, vol. 75(4), pages 1067-1093, April.
    2. Flavio DelbonoBy & Luca Lambertini, 2022. "Innovation and product market concentration: Schumpeter, arrow, and the inverted U-shape curve [Lessons from schumpeterian growth theory]," Oxford Economic Papers, Oxford University Press, vol. 74(1), pages 297-311.
    3. Wolfgang Becker & Jurgen Peters, 1998. "R&D-Competition Between Vertical Corporate Networks: Market Structure and Strategic R&D-Spillovers," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 6(1), pages 51-72.
    4. Erkal, Nisvan, 2005. "The decision to patent, cumulative innovation, and optimal policy," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 535-562, September.
    5. Flavio Delbono & Luca Lambertini, 2022. "Innovation and the persistence of monopoly under diseconomies of scope or scale," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(4), pages 747-757, December.
    6. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978.
    7. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    8. Atal, Vidya & Bar, Talia & Gordon, Sidartha, 2016. "Project selection: Commitment and competition," Games and Economic Behavior, Elsevier, vol. 96(C), pages 30-48.
    9. Clément Bonnet, 2016. "Revisiting the optimal patent policy tradeoff for environmental technologies," EconomiX Working Papers 2016-34, University of Paris Nanterre, EconomiX.
    10. Thijssen, J.J.J., 2003. "Investment under uncertainty, market evolution and coalition spillovers in a game theoretic perspective," Other publications TiSEM 672073a6-492e-4621-8d4a-0, Tilburg University, School of Economics and Management.
    11. Darius Lakdawalla & Tomas Philipson & Y. Richard Wang, 2006. "Intellectual Property and Marketing," NBER Working Papers 12577, National Bureau of Economic Research, Inc.
    12. Hinloopen, Jeroen & Smrkolj, Grega & Wagener, Florian, 2013. "In Defense of Trusts: R&D Cooperation in Global Perspective," MPRA Paper 63551, University Library of Munich, Germany, revised 09 Apr 2015.
    13. Jeroen Hinloopen & Grega Smrkolj & Florian Wagener, 2016. "R&D Cooperatives and Market Collusion: A Global Dynamic Approach," Tinbergen Institute Discussion Papers 16-048/II, Tinbergen Institute.
    14. Parry, Ian W H, 1998. "Pollution Regulation and the Efficiency Gains from Technological Innovation," Journal of Regulatory Economics, Springer, vol. 14(3), pages 229-254, November.
    15. Julio R. Robledo, 2005. "The Effect of Litigation on Intellectual Property and Welfare," Vienna Economics Papers 0511, University of Vienna, Department of Economics.
    16. S. Keith Berry, 2006. "Firm Incentives for Invention Prizes with Multiple Winners," Eastern Economic Journal, Eastern Economic Association, vol. 32(1), pages 83-95, Winter.
    17. Harhoff, Dietmar, 1991. "R&D incentives and spillovers in a two-industry model," ZEW Discussion Papers 91-06, ZEW - Leibniz Centre for European Economic Research.
    18. Popov, E. V. & Vlasov, M. V. & Shishkina, A. Yu. & Yakimova, A. V., 2016. "Institutional Analysis of Resource Potential for Knowledge Generation in the Enterprises of the Regional Defense-Industrial Sector," R-Economy, Ural Federal University, Graduate School of Economics and Management, vol. 2(3), pages 314-323.
    19. Leibowicz, Benjamin D., 2018. "Welfare improvement windows for innovation policy," Research Policy, Elsevier, vol. 47(2), pages 390-398.
    20. Masahiro Okuno-Fujiwara, 1991. "Industrial Policy in Japan: A Political Economy View," NBER Chapters, in: Trade with Japan: Has the Door Opened Wider?, pages 271-304, National Bureau of Economic Research, Inc.

    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:ags:aaea03:22114. 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: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.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.