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An Optimal Rule for Patent Damages Under Sequential Innovation

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  • Chen, Yongmin
  • Sappington, david

Abstract

We analyze the optimal design of damages for patent infringement in settings where the patent of an initial innovator may be infringed by a follow-on innovator. We consider damage rules that are linear combinations of the popular "lost profit" (LP) and "unjust enrichment" (UE) rules, coupled with a lump-sum transfer between the innovators. We identify conditions under which a linear rule can induce the socially optimal levels of sequential innovation and the optimal allocation of industry output. We also show that, despite its simplicity, the optimal linear rule achieves the highest welfare among all rules that ensure a balanced budget for the industry, and often secures substantially more welfare than either the LP rule or the UE rule.

Suggested Citation

  • Chen, Yongmin & Sappington, david, 2016. "An Optimal Rule for Patent Damages Under Sequential Innovation," MPRA Paper 73438, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:73438
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    Cited by:

    1. Chen, Yongmin, 2020. "Improving market performance in the digital economy," China Economic Review, Elsevier, vol. 62(C).
    2. Ganguly, Madhuparna, 2021. "Competition and Innovation: the effects of scientist mobility and stronger patent rights," MPRA Paper 107831, University Library of Munich, Germany.
    3. Ganguly, Madhuparna, 2021. "Stronger Patent Regime, Innovation and Scientist Mobility," MPRA Paper 107635, University Library of Munich, Germany.
    4. Bar, Talia & Kalinowski, Jesse, 2019. "Patent validity and the timing of settlements," International Journal of Industrial Organization, Elsevier, vol. 67(C).
    5. Madhuparna Ganguly, 2020. "Stricter patent regime, scientist mobility and innovation," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-037, Indira Gandhi Institute of Development Research, Mumbai, India.
    6. Turner, John L., 2018. "Input complementarity, patent trolls and unproductive entrepreneurship," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 168-203.
    7. Leiva Bertran, Fernando J. & Turner, John L., 2017. "Welfare-optimal patent royalties when imitation is costly," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 457-475.

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    More about this item

    Keywords

    Patents; sequential innovation; infringement damages; linear rules for patent damages.;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • K2 - Law and Economics - - Regulation and Business Law
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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