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Finding "Lost" Profits: An Equilibrium Analysis of Patent Infringement Damages

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  • James J. Anton
  • Dennis A. Yao

Abstract

We examine the impact of patent infringement damages in an equilibrium oligopoly model of process innovation where the choice to infringe is endogenous and affects market choices. Under the lost profits measure of damages normally employed by U.S. courts, we find that infringement always occurs in equilibrium with the infringing firm making market choices that manipulate the resulting market profit of the patent holder. In equilibrium, infringement takes one of two forms: a "passive" form in which lost profits of the patent holder are zero and an "aggressive" form where they are strictly positive. Even though the patentee's profits are protected with the lost profits damage measure, innovation incentives are reduced relative to a regime where infringement is deterred. Copyright 2007, Oxford University Press.

Suggested Citation

  • James J. Anton & Dennis A. Yao, 2007. "Finding "Lost" Profits: An Equilibrium Analysis of Patent Infringement Damages," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(1), pages 186-207, April.
    • Handle: RePEc:oup:jleorg:v:23:y:2007:i:1:p:186-207
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    File URL: http://hdl.handle.net/10.1093/jleo/ewm008
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    Cited by:

    1. David Encaoua & Yassine Lefouili, 2010. "Choosing Intellectual Protection: Imitation, Patent Strength, and Licensing," NBER Chapters, in: Contributions in Memory of Zvi Griliches, pages 241-271, National Bureau of Economic Research, Inc.
    2. Apurva Dey & Arun Kumar Kaushik & Rupayan Pal, 2017. "Probabilistic patents, alternative damage rules and optimal trade policy," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2017-004, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Ganguly, Madhuparna, 2021. "Stronger Patent Regime, Innovation and Scientist Mobility," MPRA Paper 107635, University Library of Munich, Germany.
    4. Ponce, Carlos J., 2011. "Knowledge disclosure as intellectual property rights protection," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 418-434.
    5. Choi, Jay Pil, 2009. "Alternative damage rules and probabilistic intellectual property rights: Unjust enrichment, lost profits, and reasonable royalty remedies," Information Economics and Policy, Elsevier, vol. 21(2), pages 145-157, June.
    6. Matthew D. Henry & John L. Turner, 2010. "Patent Damages And Spatial Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 58(2), pages 279-305, June.
    7. Hylton, Keith N. & Zhang, Mengxi, 2017. "Optimal remedies for patent infringement," International Review of Law and Economics, Elsevier, vol. 52(C), pages 44-57.
    8. Turner, John L., 2018. "Input complementarity, patent trolls and unproductive entrepreneurship," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 168-203.
    9. Yann Ménière & Sarah Parlane, 2008. "Innovation in the Shadow of Patent Litigation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 32(2), pages 95-111, March.
    10. Vargas Barrenechea, Martin, 2008. "Licensing probabilistic Patents: The duopoly case," MPRA Paper 9925, University Library of Munich, Germany.
    11. Ganguly, Madhuparna, 2021. "Competition and Innovation: the effects of scientist mobility and stronger patent rights," MPRA Paper 107831, University Library of Munich, Germany.
    12. Maria Caterina Bramati & Arsen Palestini & Mauro Rota, 2016. "Effects of Law-Enforcement Efficiency and Duration of Trials in an Oligopolistic Competition Among Fair and Unfair Firms," Journal of Optimization Theory and Applications, Springer, vol. 170(2), pages 650-669, August.
    13. Douglas H. Frank & Tomasz Obloj, 2014. "Firm‐specific human capital, organizational incentives, and agency costs: Evidence from retail banking," Strategic Management Journal, Wiley Blackwell, vol. 35(9), pages 1279-1301, September.
    14. Buzzacchi, Luigi & Scellato, Giuseppe, 2008. "Patent litigation insurance and R&D incentives," International Review of Law and Economics, Elsevier, vol. 28(4), pages 272-286, December.
    15. Silvana Krasteva, 2014. "Imperfect Patent Protection and Innovation," Journal of Industrial Economics, Wiley Blackwell, vol. 62(4), pages 682-708, December.
    16. Yongmin Chen & David E.M. Sappington, 2018. "An optimal rule for patent damages under sequential innovation," RAND Journal of Economics, RAND Corporation, vol. 49(2), pages 370-397, June.
    17. Madhuparna Ganguly, 2020. "Stricter patent regime, scientist mobility and innovation," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-037, Indira Gandhi Institute of Development Research, Mumbai, India.
    18. Leiva Bertran, Fernando J. & Turner, John L., 2017. "Welfare-optimal patent royalties when imitation is costly," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 457-475.

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