Probabilistic Patents, Alternative Damage Rules and Optimal Tariffs

Abstract

This paper analyzes interdependencies between optimal trade policy and ‘preferred’ liability doctrine to assess infringement damages, when intellectual property rights are probabilistic, in a model of import competition between a foreign patentee and a domestic infringer. It shows two reversal results. First, a regime switch from protectionism to free trade reverses stakeholders’ preferences over liability doctrines. Second, the optimal trade policy changes from an import tariff under the ‘lost profit’ rule to import subsidization under the ‘unjust enrichment’ rule, unless the patent is weak. It is found that free trade is not optimal, except for a few knife-edge cases.

Keywords: Probabilistic Intellectual Property Rights; Infringement; Damage Rules; Import Competition; Trade Policy

JEL Classification: O34; L13; K40; F13