Optimal Licensing of Uncertain Patents in the Shadow of Litigation

Games and Economic Behavior, 88 (2014) 320–338

19 Pages Posted: 20 Jan 2015

See all articles by Rabah Amir

Rabah Amir

University of Arizona - Department of Economics; University of Arizona

David Encaoua

Université Paris I Panthéon Sorbonne

Yassine Lefouili

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: May 2, 2014

Abstract

This paper investigates the choice of a licensing mechanism by the holder of a patent whose validity is uncertain. We provide sufficient conditions of a general nature under which the licensor prefers to use a per-unit royalty contract. In particular we show that this is the case for the holders of weak patents if the strategic effect of an increase in a potential licensee’s unit cost on the equilibrium industry profit is positive. The latter condition is shown to hold in a Cournot (resp. Bertrand) oligopoly with homogeneous (resp. differentiated) products under general assumptions on the demands faced by firms. As a byproduct of our analysis, we contribute to the literature on the cost paradox in oligopoly by offering some new insights of independent interest regarding the effects of cost variations on Cournot and Bertrand equilibria.

Keywords: Licensing mechanisms, Uncertain patents, Patent litigation, Cost comparative statics

JEL Classification: D45, L10, O32, 034

Suggested Citation

Amir, Rabah and Encaoua, David and Lefouili, Yassine, Optimal Licensing of Uncertain Patents in the Shadow of Litigation (May 2, 2014). Games and Economic Behavior, 88 (2014) 320–338. Available at SSRN: https://ssrn.com/abstract=2552137

Rabah Amir

University of Arizona - Department of Economics ( email )

Tucson, AZ 85721
United States

University of Arizona ( email )

Department of History
Tucson, AZ 85721
United States

David Encaoua (Contact Author)

Université Paris I Panthéon Sorbonne ( email )

MSE, 106-112 Bd de l'Hôpital 75013 Paris
Paris, 75013
France

Yassine Lefouili

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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