Patent Privateering, Litigation, and R&D Incentives
74 Pages Posted: 11 Aug 2013 Last revised: 2 Nov 2018
Date Written: March 1, 2017
We model “patent privateering”—whereby producing firms sell patents to patent assertion entities (PAEs) which then license them under the threat of litigation—in a bargaining game. PAEs can negotiate higher licensing fees than producing firms, because they cannot be counter-sued for infringement. Privateering produces two countervailing effects: it increases the offensive value of patents, whereas it decreases their defensive value and lowers the aggregate surplus of producing firms. Embedding the bargaining game into an R&D contest for multiple complementary technologies, we find that privateering may increase R&D investments, even as it induces more litigation threats and reduces industry profits.
Keywords: Patent privateering, patent assertion entities, litigation, patent licensing, R&D, innovation, counter-suing, transaction costs
JEL Classification: D2, K2, K4, L4, L13, O3
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