Patent infringement, litigation, and settlement

We propose a model that integrates a series of events regarding patent rights based on real option framework. After the incumbent has acquired a patent, it can be infringed by the challenger, and the conflict between them can be resolved via litigation or settlement with endogenously determined triggers and royalties. The model explains why litigation is so unusual in the real world and why most of the lawsuits over patent rights cease before the court's judgment is made. It also clarifies why roughly a half of litigated patents are found to be invalid in court and in what circumstances the introduction of new technology or the infringement of patent is delayed. From the perspective of implications on patent system, the model shows that neither tightening the patent examination nor widening the patent scope guarantees the acceleration of R&D investment, and rather delays it in some cases.