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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. Cornell, Bradford, 1990. "The Incentive to Sue: An Option-Pricing Approach," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 19(1), pages 173-87, January.
  2. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 392, C.E.P.R. Discussion Papers.
  3. Schweizer, Urs, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(2), pages 163-77, April.
  4. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 13(1), pages 1-56, January.
  5. Pakes, Ariel, 1985. "On Patents, R&D, and the Stock Market Rate of Return," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 390-409, April.
  6. Richard Gilbert & Carl Shapiro, 1990. "Optimal Patent Length and Breadth," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 106-112, Spring.
  7. 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.
  8. Bronwyn H. Hall & Adam B. Jaffe & Manuel Trajtenberg, 2000. "Market Value and Patent Citations: A First Look," NBER Working Papers 7741, National Bureau of Economic Research, Inc.
  9. 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.
  10. 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, Elsevier, vol. 18(7), pages 1105-1127, October.
  11. Bronwyn H. Hall & Adam B. Jaffe & Manuel Trajtenberg, 2001. "The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools," NBER Working Papers 8498, National Bureau of Economic Research, Inc.
  12. Waldfogel, Joel, 1995. "The Selection Hypothesis and the Relationship between Trial and Plaintiff Victory," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(2), pages 229-60, April.
  13. Reiss, Ariane, 1998. "Investment in Innovations and Competition: An Option Pricing Approach," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 38(3, Part 2), pages 635-650.
  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. Kortum, Samuel & Lerner, Josh, 1999. "What is behind the recent surge in patenting?1," Research Policy, Elsevier, Elsevier, vol. 28(1), pages 1-22, January.
  16. 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.
  17. 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.
  18. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(3), pages 729-47, July.
  19. 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, De Gruyter, vol. 4(1), pages 1-47, September.
  20. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(478), pages C97-C116, March.
  21. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(3), pages 229-263, September.
  22. Lerner, Josh, 1995. "Patenting in the Shadow of Competitors," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 38(2), pages 463-95, October.
  23. Harhoff, Dietmar & Scherer, Frederic M. & Vopel, Katrin, 2003. "Citations, family size, opposition and the value of patent rights," Research Policy, Elsevier, Elsevier, vol. 32(8), pages 1343-1363, September.
  24. Michael J. Meurer, 1989. "The Settlement of Patent Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 77-91, Spring.
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Cited by:
  1. James Bessen, 2006. "The Value of U.S. Patents by Owner and Patent Characteristics," Working Papers, Research on Innovation 0603, Research on Innovation.
  2. Gupeng, Zhang & Xiangdong, Chen, 2012. "The value of invention patents in China: Country origin and technology field differences," China Economic Review, Elsevier, Elsevier, vol. 23(2), pages 357-370.
  3. Emmanuel Dechenaux & Brent Goldfarb & Scott Shane & Marie Thursby, 2008. "Appropriability and Commercialization: Evidence from MIT Inventions," Management Science, INFORMS, INFORMS, vol. 54(5), pages 893-906, May.
  4. Marco, Alan C., 2007. "The dynamics of patent citations," Economics Letters, Elsevier, Elsevier, vol. 94(2), pages 290-296, February.
  5. Chi Leung & Yue Kwok, 2011. "Real options game analysis of sleeping patents," Decisions in Economics and Finance, Springer, Springer, vol. 34(1), pages 41-65, May.
  6. repec:ebl:ecbull:v:11:y:2007:i:1:p:1-7 is not listed on IDEAS
  7. 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, Elsevier, vol. 28(C), pages 37-54.

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