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Patent Settlements as a Barrier to Entry

31 Pages Posted: 19 May 2009 Last revised: 21 Mar 2011

Anne Duchene

IPAG Business School

Konstantinos Serfes

Drexel University - School of Economics

Date Written: March 8, 2011

Abstract

Empirical studies have found that most patent litigations are resolved through settlements rather than trials. Moreover, license fees negotiated in settlement agreements have become very large. We formulate a model of sequential entry with an incumbent patent holder, multiple potential entrants and asymmetric information about the validity of the infringed patent (patent strength) between firms that are already in the market and future potential entrants. Within this framework we show that patent settlements between the incumbent and the first entrant can be mutually beneficial even when the cost of trial is zero and the settlement agreement takes the form of a simple fixed license fee. For patents of intermediate strength, settlements are a tool for further entry deterrence. The two parties agree on a high settlement amount which sends a credible signal to 'outsiders' that the incumbent's patent is not weak and therefore further entry will not be profitable. This provides a novel explanation for the role of settlements and to the recent observation of high license fees negotiated in settlement agreements. Our analysis demonstrates than even non-reverse settlements that entail only a fixed fee can be anticompetitive because they are used to block further entry.

Keywords: Patent settlements, Asymmetric information, Entry deterrence

JEL Classification: L13, O34, K41

Suggested Citation

Duchene, Anne and Serfes, Konstantinos, Patent Settlements as a Barrier to Entry (March 8, 2011). Available at SSRN: https://ssrn.com/abstract=1406483 or http://dx.doi.org/10.2139/ssrn.1406483

Anne Duchene (Contact Author)

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

Konstantinos Serfes

Drexel University - School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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