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How Strong Are Weak Patents?

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  • Farrell, Joseph
  • Shapiro, Carl

Abstract

We analyze patent licensing by a patent holder to downstream technology users. We study how the structure and level of royalties depends on the patent’s strength, i.e., the probability it would be upheld in court. We examine the social value of determining patent validity before licensing, in terms of deadweight loss (ex post) and innovation incentives (ex ante). When downstream users do not compete against each other or the patent holder, license fees approximate the license fee for an ironclad patent times the patent strength, and reviewing validity before licensing would be unproductive (in expected value). But when downstream users compete, two-part tariffs for weak patents have high running royalty rates, combined with a negative fixed fee, and examining patent validity generates social benefits, both ex post and ex ante. Even without negative fixed fees, rival downstream firms will accept relatively high running royalties, so determining patent validity prior to licensing is socially beneficial.

Suggested Citation

  • Farrell, Joseph & Shapiro, Carl, 2007. "How Strong Are Weak Patents?," Competition Policy Center, Working Paper Series qt8vg425vj, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:compol:qt8vg425vj
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    References listed on IDEAS

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    1. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 567-589.
    2. Benjamin Chiao & Josh Lerner & Jean Tirole, 2007. "The rules of standard-setting organizations: an empirical analysis," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 905-930, December.
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    5. Jay Pil Choi, 2005. "Live and Let Live: A Tale of Weak Patents," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 724-733, 04/05.
    6. Chun-Hsiung Liao & Debapriya Sen, 2005. "Subsidy In Licensing: Optimality And Welfare Implications," Manchester School, University of Manchester, vol. 73(3), pages 281-299, June.
    7. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
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    More about this item

    Keywords

    probabilistic patents; weak patents; patent licensing; patent reform; oligopoly;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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