Sharpen your Sword for Litigation: Incumbent Strategic Reaction to the Threat of Entry

Abstract

While patents have been shown to play a role as barriers to entry, they also reveal information about incumbent strategies and risk being invalidated. We examine the tradeoff incumbents face between using their patents ex-ante as entry deterrents or ex-post once competitors have revealed their moves. Leveraging the unique characteristics of the pharmaceutical sector, where it is possible to observe exactly when a competitor entry threat materializes, and exploiting exogenous variation in that timing, we show that incumbents intentionally fragment and delay the full disclosure of their intellectual property rights through continuation patents. They disproportionately reveal continuation patents after a competitor entry threat becomes concrete, tailoring their response to the threat they have received and successfully delaying competitor entry through litigation. The detected incumbents' reaction is stronger when their attacked drugs are valuable and when the patents listed at the FDA approval of a drug are relatively narrow in scope.

Keywords: Strategic Reactions, Innovation, Second Mover Advantage, Information Asymmetries, Continuation patents

JEL Classification: I18, L5, L65, M2