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The Option Value of Patent Litigation: Theory and Evidence

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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.

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File URL: http://irving.vassar.edu/VCEWP/VCEWP52.pdf
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Bibliographic Info

Paper provided by Vassar College Department of Economics in its series Vassar College Department of Economics Working Paper Series with number 52.

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Date of creation: Nov 2001
Date of revision: Dec 2003
Handle: RePEc:vas:papers:52

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  1. Schweizer, Urs, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 163-77, April.
  2. 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.
  3. Richard Gilbert and Carl Shapiro., 1989. "Optimal Patent Length and Breadth," Economics Working Papers 89-102, University of California at Berkeley.
  4. 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.
  5. Bronwyn H. Hall & Adam Jaffe & Manuel Trajtenberg, 2002. "Market Value and Patent Citations: A First Look," Development and Comp Systems 0201001, EconWPA.
  6. 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.
  7. Hall, Bronwyn H & Jaffe, Adam B & Trajtenberg, Manuel, 2001. "The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools," CEPR Discussion Papers 3094, C.E.P.R. Discussion Papers.
  8. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
  9. Michael J. Meurer, 1989. "The Settlement of Patent Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 77-91, Spring.
  10. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
  11. Marco Alan C., 2004. "The Selection Effects (and Lack Thereof) in Patent Litigation: Evidence from Trials," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-47, September.
  12. 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.
  13. 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.
  14. Kortum, Samuel & Lerner, Josh, 1999. "What is behind the recent surge in patenting?1," Research Policy, Elsevier, vol. 28(1), pages 1-22, January.
  15. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages C97-C116, March.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. 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.
  21. 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.
  22. Joel Waldfogel, 1993. "The Selection Hypothesis and the Relationship between Trial and Plaintiff Victory," NBER Working Papers 4508, National Bureau of Economic Research, Inc.
  23. 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.
  24. 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.
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Citations

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Cited by:
  1. 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.
  2. James Bessen, 2006. "The Value of U.S. Patents by Owner and Patent Characteristics," Working Papers 0603, Research on Innovation.
  3. repec:ebl:ecbull:v:11:y:2007:i:1:p:1-7 is not listed on IDEAS
  4. Gupeng, Zhang & Xiangdong, Chen, 2012. "The value of invention patents in China: Country origin and technology field differences," China Economic Review, Elsevier, vol. 23(2), pages 357-370.
  5. Emmanuel Dechenaux & Brent Goldfarb & Scott Shane & Mari Thursby, 2006. "Appropriability and Commercialization: Evidence from MIT Inventions," Discussion Papers 05-017, Stanford Institute for Economic Policy Research.
  6. Zhang, Gupeng & Lv, Xiaofeng & Zhou, Jianghua, 2014. "Private value of patent right and patent infringement: An empirical study based on patent renewal data of China," China Economic Review, Elsevier, vol. 28(C), pages 37-54.
  7. Marco, Alan C., 2007. "The dynamics of patent citations," Economics Letters, Elsevier, vol. 94(2), pages 290-296, February.

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