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An Option-Based View of Imperfect Patent Protection

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  • Philipp N. Baecker

    () (Department of Finance and Accounting, EUROPEAN BUSINESS SCHOOL (ebs), International University Schloß Reichartshausen)

Abstract

Given a noticeable degradation of patent quality, patenting has come to resemble the purchase of a lottery ticket. Rising cost of engaging in litigation over intellectual property (IP) assets substantially diminishes their value as an incentive to invest in research (Lanjouw and Schankerman, 2001). The author proposes an option-based view (OBV) of imperfect patent protection as a formal strategic model of so-called probabilistic patents (Lemley and Shapiro, 2005), which may serve as a starting point for further investigations into the impact of patent risk on firm values and research incentives. More specifically, the real option approach is employed to demonstrate how, due to increased litigation activity in red oceans, rising profit rates may lead to falling patent values, calling for a careful tradeoff between reliable patent protection in mature markets and seemingly attractive business opportunities in industries such as pharmaceutical biotechnology.

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Bibliographic Info

Paper provided by Department of Finance and Accounting, EUROPEAN BUSINESS SCHOOL (ebs), International University Schloß Reichartshausen in its series ebs Working Papers on Finance and Accounting with number 060601.

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Length: 37 pages
Date of creation: 23 Jun 2006
Date of revision: 10 Jan 2007
Handle: RePEc:ebs:finacc:060601

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Keywords: capital budgeting; intellectual property; litigation; real options;

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