39 Pages Posted: 25 Aug 2011 Last revised: 13 Oct 2016
Date Written: July 21, 2016
I introduce and analyze an equilibrium model of discovery, innovation, patenting and inadvertent infringement. Profitable use of innovations requires adaptation of complementary inputs. This adaptation carries a direct cost if and only if the required input technology has not been discovered by another firm, and may lead to inadvertent infringements that carry a dispute cost. The main analysis considers whether and when it is optimal to have some firms discover and patent only -- that is, behave as non-practicing entities -- and whether and when it is optimal to treat patents for discoveries differently from patents for innovations. I find that non-practicing entities increase welfare only if the relative cost of technology adaptation is higher than the dispute cost. And if royalties are "too high," then "too many" firms choose to be non-practicing entities instead of innovate, and welfare is higher without non-practicing entities. It may be optimal to deter non-practicing entities by eliminating patents for discoveries.
Keywords: discovery, innovation, litigation, non-practicing entities, patents, patent assertion entities, thickets, trolls
JEL Classification: K2, L2, O3
Suggested Citation: Suggested Citation
By Mark Lemley
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