78 Pages Posted: 25 Aug 2004
Date Written: March 1, 2005
This article presents a new theory of patent value, responding to growing empirical evidence that the traditional appropriability premise of patents is fundamentally incomplete in the modern innovation environment. We find that for patents, the whole is greater than the sum of its parts: the true value of patents lies not in their individual worth, but in their aggregation into a collection of related patents, a patent portfolio.
The patent portfolio theory thus explains what is known as "the patent paradox": in recent years patent intensity - patents obtained per research and development dollar - has risen dramatically even as the expected value of individual patents has diminished. We find the benefits of patent portfolios to be so significant as to suggest that firms' patenting decisions are essentially unrelated to the expected value of individual patents; because patent portfolios simultaneously increase both the scale and the diversity of available marketplace protections for innovations, firms will typically seek to obtain a large quantity of related patents, rather than evaluating their actual worth. The result - which we find widely recognized in commercial circles - is that the modern patenting environment exhibits (and requires) a high-volume, portfolio-based approach that is at odds with scholars' traditional assumptions.
The implications of the portfolio theory of patents are important and widespread. First, the explanatory power of the theory allows resolution of not only the patent paradox, but many of the otherwise-puzzling observable patterns in the modern patenting environment - such as firm-size differences in patent intensity and litigation rates. Second, the patent portfolio theory neatly complements the prior theories that have sought to explain modern patent value, strengthening their relationship with the reality of patenting behavior - and confirming that the value of patents has expanded beyond traditionalist notions. Third, the patent portfolio theory allows a number of important predictive insights into future trends in the patent system, allowing policymakers and scholars to frame their inquiry within a range of likely outcomes. In our analysis, the patent portfolio theory does not suggest a better, brighter future for the patent system, but does build a foundation for the important academic and policy-related work that springs from this initial treatment.
Keywords: patents, patent value, portfolios, patent theory, patent paradox
JEL Classification: K00, K11
Suggested Citation: Suggested Citation