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Optimal Licensing of Uncertain Patents in the Shadow of Litigation

  • Rabah Amir

    (University of Arizona - University of Arizona)

  • David Encaoua

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

  • Yassine Lefouili

    ()

    (Toulouse School of Economics - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

The paper investigates the choice of a licensing mechanism by the holder of a patent whose validity may be challenged. Focusing fi rst on weak patents, i.e. patents that have a high probability of being invalidated by a court if challenged, we show that the patent holder fi nds it optimal to use a per-unit royalty contract if the strategic effect of an increase in a potential licensee’s unit cost on the equilibrium industry profi t is positive. The latter condition ensures the superiority of the per-unit royalty mechanism independently of whether the patent holder is an industry insider or outsider, and is shown to hold in a Cournot (resp. Bertrand) oligopoly with homogeneous (resp. differentiated) products under general assumptions on the demands faced by fi rms. We then examine the optimal licensing of patents that are uncertain but not necessarily weak. As a byproduct of our analysis, we contribute to the oligopoly literature by offering some new insights of independent interest regarding the effects of cost variations on Cournot and Bertrand equilibria.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00847955.

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Date of creation: 24 May 2013
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Handle: RePEc:hal:cesptp:halshs-00847955
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