An Economic Model of Patent Exhaustion

18 Pages Posted: 27 Oct 2020

See all articles by Olena Ivus

Olena Ivus

Smith School of Business

Edwin Lai

Hong Kong University of Science & Technology (HKUST)

Ted Sichelman

University of San Diego

Multiple version iconThere are 3 versions of this paper

Date Written: Winter 2020

Abstract

The doctrine of patent exhaustion implies that the authorized sale of patented goods “exhausts” the patent rights in the goods sold and precludes additional license fees from downstream buyers. Courts have considered absolute exhaustion, in which the patent owner forfeits all rights upon an authorized sale, and presumptive exhaustion, in which the patent owner may opt‐out of exhaustion via contract. This paper offers the first economic model of domestic patent exhaustion that incorporates transaction costs in licensing downstream buyers and considers how the shift from absolute to presumptive exhaustion affects social welfare. We show that when transaction costs are high, the patent owner has no incentive to individually license downstream users, and absolute and presumptive exhaustion regimes are equivalent. But when transaction costs are at the intermediate level, the patent owner engages in mixed licensing, individually licensing high‐valuation buyers and uniformly licensing low‐valuation buyers. Presumptive exhaustion is socially optimal when social benefits from buyer‐specific pricing outweigh social costs from transaction cost frictions in individualized licensing, which requires sufficiently low transaction costs.

Suggested Citation

Ivus, Olena and Lai, Edwin and Sichelman, Ted, An Economic Model of Patent Exhaustion (Winter 2020). Journal of Economics & Management Strategy, Vol. 29, Issue 4, pp. 816-833, 2020, Available at SSRN: https://ssrn.com/abstract=3719217 or http://dx.doi.org/10.1111/jems.12393

Olena Ivus (Contact Author)

Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Edwin Lai

Hong Kong University of Science & Technology (HKUST)

Clearwater Bay
Kowloon, 999999
Hong Kong

Ted Sichelman

University of San Diego

5998 Alcala Park
San Diego, CA 92110-2492
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
96
PlumX Metrics