Limiting Patentees' Market Power Without Reducing Innovation Incentives: The Perverse Benefits of Uncertainty and Non-Injunctive Remedies

Abstract

Allowing patentees to profit from their patents encourages innovation. However, legal scholars have failed to appreciate that unconstrained monopoly pricing is socially inefficient, in that the last bit of monopoly pricing produces large amounts of deadweight loss for a relatively small amount of patentee profit. Uncertainty and delay in patent litigation may be a way of giving patentees constrained market power to reduce this inefficiency. It is possible to limit patentee's market power without reducing their incentives to innovate. Because the profit curve is "stationary" at the profit-maximizing price, small reduction from the monopoly price will not substantially reduce the patentee's incentive to innovate (but will yield substantial decreases in the dead weight loss). And more substantial reduction in monopoly pricing can be efficiently offset by increases in patent duration. Society would be better off giving patentees limited market power for a longer period rather than giving patentees monopoly power for a shorter period.