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The option value of patent litigation: Theory and evidence

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  • Marco, Alan C.

Abstract

In this paper I present a real options model of patent litigation when patents are not perfectly enforceable. I consider both finite horizon and infinite horizon models. The theoretical results demonstrate that patent value depends not only on the underlying technology, but also on the degree of uncertainty over the property right. Additionally, uncertain property rights create an effective patent term that is less than the statutory term. Using simulation methods and patent data, I estimate the hazard rate of patent litigation. I find that, contrary to previous results, the most valuable patents are not the primary candidates for litigation.

(This abstract was borrowed from another version of this item.)

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File URL: http://www.sciencedirect.com/science/article/B6W61-4FSNXY0-4/2/0503bac625287de2bf803a7290c8e0ef
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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 14 (2005)
Issue (Month): 3-4 ()
Pages: 323-351

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Handle: RePEc:eee:revfin:v:14:y:2005:i:3-4:p:323-351

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Web page: http://www.elsevier.com/locate/inca/620170

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References

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  1. Lanjouw, Jean O & Schankerman, Mark, 2001. "Characteristics of Patent Litigation: A Window on Competition," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 129-51, Spring.
  2. Bronwyn H. Hall, Adam Jaffe and Manuel Trajtenberg., 2000. "Market Value and Patent Citations: A First Look," Economics Working Papers E00-277, University of California at Berkeley.
  3. Joshua Lerner, 1994. "The Importance of Patent Scope: An Empirical Analysis," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 319-333, Summer.
  4. Cornell, Bradford, 1990. "The Incentive to Sue: An Option-Pricing Approach," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 173-87, January.
  5. Jean Olson Lanjouw, 1994. "Economic Consequences of a Changing Litigation Environment: The Case of Patents," NBER Working Papers 4835, National Bureau of Economic Research, Inc.
  6. Hall, B. & Jaffe, A. & Trajtenberg, M., 2001. "The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools," Papers 2001-29, Tel Aviv.
  7. Waldfogel, Joel, 1995. "The Selection Hypothesis and the Relationship between Trial and Plaintiff Victory," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 229-60, April.
  8. Kortum, Samuel & Lerner, Josh, 1999. "What is behind the recent surge in patenting?1," Research Policy, Elsevier, vol. 28(1), pages 1-22, January.
  9. Schweizer, Urs, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 163-77, April.
  10. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 729-47, July.
  11. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
  12. Ariel Pakes, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," NBER Working Papers 1340, National Bureau of Economic Research, Inc.
  13. Harhoff, Dietmar & Scherer, Frederic M. & Vopel, Katrin, 2003. "Citations, family size, opposition and the value of patent rights," Research Policy, Elsevier, vol. 32(8), pages 1343-1363, September.
  14. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-97, September.
  15. Michael J. Meurer, 1989. "The Settlement of Patent Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 77-91, Spring.
  16. Lerner, Josh, 1995. "Patenting in the Shadow of Competitors," Journal of Law and Economics, University of Chicago Press, vol. 38(2), pages 463-95, October.
  17. Gilbert, R. & Shapiro, C., 1988. "Optimal Patent Length And Breadth," Papers 28, Princeton, Woodrow Wilson School - Discussion Paper.
  18. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-84, July.
  19. Pakes, Ariel, 1985. "On Patents, R&D, and the Stock Market Rate of Return," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 390-409, April.
  20. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 1-56, January.
  21. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
  22. Reiss, Ariane, 1998. "Investment in Innovations and Competition: An Option Pricing Approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 635-650.
  23. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages C97-C116, March.
  24. Takalo, Tuomas & Kanniainen, Vesa, 2000. "Do patents slow down technological progress?: Real options in research, patenting, and market introduction," International Journal of Industrial Organization, Elsevier, vol. 18(7), pages 1105-1127, October.
  25. Pakes, Ariel, 1985. "On Patents, R & D, and the Stock Market Rate of Return," Scholarly Articles 3436409, Harvard University Department of Economics.
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Citations

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Cited by:
  1. Marco, Alan C., 2007. "The dynamics of patent citations," Economics Letters, Elsevier, vol. 94(2), pages 290-296, February.
  2. James Bessen, 2006. "The Value of U.S. Patents by Owner and Patent Characteristics," Working Papers 0603, Research on Innovation.
  3. Alan Marco & Kieran Walsh, 2007. "Credibility and Credulity: How Beliefs about Beliefs Affect Entry Incentives," Economics Bulletin, AccessEcon, vol. 11(1), pages 1-7.
  4. Emmanuel Dechenaux & Brent Goldfarb & Scott Shane & Marie Thursby, 2008. "Appropriability and Commercialization: Evidence from MIT Inventions," Management Science, INFORMS, vol. 54(5), pages 893-906, May.
  5. Chi Leung & Yue Kwok, 2011. "Real options game analysis of sleeping patents," Decisions in Economics and Finance, Springer, vol. 34(1), pages 41-65, May.

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