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


  • James J. Anton
  • Dennis A. Yao


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," 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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    References listed on IDEAS

    1. Kathryn E. Spier, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 93-108.
    2. Ausubel, Lawrence M. & Cramton, Peter & Deneckere, Raymond J., 2002. "Bargaining with incomplete information," Handbook of Game Theory with Economic Applications,in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 50, pages 1897-1945 Elsevier.
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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. Ponce, Carlos J., 2011. "Knowledge disclosure as intellectual property rights protection," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 418-434.
    3. Apurva Dey & Arun Kaushik & Rupayan Pal, 2017. "Probabilistic Patents, Alternative Damage Rules and Optimal Trade Policy," Working Papers id:11748, eSocialSciences.
    4. repec:spr:joptap:v:170:y:2016:i:2:d:10.1007_s10957-016-0866-5 is not listed on IDEAS
    5. 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.
    6. 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.
    7. Matthew D. Henry & John L. Turner, 2010. "PATENT DAMAGES AND SPATIAL COMPETITION -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(2), pages 279-305, June.
    8. repec:eee:irlaec:v:52:y:2017:i:c:p:44-57 is not listed on IDEAS
    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. Chen, Yongmin & Sappington, david, 2016. "An Optimal Rule for Patent Damages Under Sequential Innovation," MPRA Paper 73438, University Library of Munich, Germany.
    11. repec:eee:indorg:v:56:y:2018:i:c:p:168-203 is not listed on IDEAS
    12. repec:eee:jeborg:v:137:y:2017:i:c:p:457-475 is not listed on IDEAS
    13. Vargas Barrenechea, Martin, 2008. "Licensing probabilistic Patents: The duopoly case," MPRA Paper 9925, University Library of Munich, Germany.

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