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Patent Protection, Takeovers, and Startup Innovation: A Dynamic Approach

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  • Andreas Panagopoulos
  • In-Uck Park

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Abstract

The impact of IP protection on the innovation incentives of startup firms is examined in a dynamic model where an incumbent faces a sequence of potential startups and the incumbent's chance of winning an infringement lawsuit increases with the size of its patent portfolio. It is shown that takeover deals generate extra benefits for the incumbent via its enhanced future bargaining positions, a part of which accrues to the current startup as an increased bargaining share. This increased bargaining share can be large enough to justify the startup's innovation activity that would not have taken place otherwise. This effect may be greatest under moderate levels of IP protection, because the increase in the bargaining share, being proportional to the marginal benefits brought by the last patent added to the portfolio, would be too small if the protection was too weak while it would taper off too quickly if the protection was excessive.

Suggested Citation

  • Andreas Panagopoulos & In-Uck Park, 2008. "Patent Protection, Takeovers, and Startup Innovation: A Dynamic Approach," The Centre for Market and Public Organisation 08/201, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:cmpowp:08/201
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    File URL: http://www.bristol.ac.uk/cmpo/publications/papers/2008/wp201.pdf
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    References listed on IDEAS

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    1. Mark A. Lemley & Carl Shapiro, 2005. "Probabilistic Patents," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 75-98, Spring.
    2. Graham, Stuart J.H. & Harhoff, Dietmar, 2006. "Can Post-Grant Reviews Improve Patent System Design? A Twin Study of US and European Patents," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 38, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Hugo Hopenhayn & Gerard Llobet & Matthew Mitchell, 2006. "Rewarding Sequential Innovators: Prizes, Patents, and Buyouts," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1041-1068, December.
    4. Llobet, Gerard, 2003. "Patent litigation when innovation is cumulative," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1135-1157, October.
    5. Panayotis Dessyllas & Alan Hughes, 2005. "R&D and Patenting Activity and the Propensity to Acquire in High Technology Industries," Working Papers wp298, Centre for Business Research, University of Cambridge.
    6. Choi, Jay Pil, 1998. "Patent Litigation as an Information-Transmission Mechanism," American Economic Review, American Economic Association, vol. 88(5), pages 1249-1263, December.
    7. Ted O'Donoghue & Suzanne Scotchmer & Jacques-François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 1-32, March.
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    Cited by:

    1. Vey Wang & Chung-Hui Lai & Lung-Sheng Lee & Shih-Wen Hu, 2010. "Franchise fee, contract bargaining, and economic growth," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 19(6), pages 539-552.
    2. Robin Kleer & Marcus Wagner, 2013. "Acquisition through innovation tournaments in high-tech industries: a comparative perspective," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 22(1), pages 73-97, January.

    More about this item

    Keywords

    Patent litigation; takeovers; patent portfolios;

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • K0 - Law and Economics - - General

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