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Does Banning Side Payments in Patent Settlements Suffice to Fully Protect Consumers?

By using a simple model of patent settlement, in this paper we show that even if side payments (negative fixed fees) are banned, a licensing agreement to settle a patent dispute may harm consumers in comparison with the expected outcome of the lawsuit. This may occur when the challenger’s expected return from litigation is low, that is when probabilistic damages are high relative to the challenger’s duopoly profits. Our model suggests that: (1) there may be large benefits to consumers from post-grant reexamination of commercially valuable patents -as stressed by Farrell and Shapiro (2008) in another context; and (2) the threat of punitive damages for patent infringement may harm consumers in the short run, perhaps without being of any help in providing the right incentive to innovate.

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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 201201.

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Length: 16 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:uto:dipeco:201201
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  1. Crampes, Claude & Langinier, Corinne, 2002. "Litigation and Settlement in Patent Infringement Cases," Staff General Research Papers 5231, Iowa State University, Department of Economics.
  2. Bryan R. Krouse & Clement G. Krouse, 2004. "Patent Infringement: Lessons from Industrial Economics," Journal of Industry, Competition and Trade, Springer, vol. 4(3), pages 191-206, 09.
  3. Joseph Farrell & Carl Shapiro, 2008. "How Strong Are Weak Patents?," American Economic Review, American Economic Association, vol. 98(4), pages 1347-69, September.
  4. 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.
  5. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
  6. Carl Shapiro, 2010. "Injunctions, Hold-Up, and Patent Royalties-super-1," American Law and Economics Review, Oxford University Press, vol. 12(2), pages 509-557.
  7. Cabral, Luis M. B., 1995. "Conjectural variations as a reduced form," Economics Letters, Elsevier, vol. 49(4), pages 397-402, October.
  8. Carl Shapiro, 2003. "Antitrust Limits to Patent Settlements," Law and Economics 0303004, EconWPA.
  9. Choi, J.P., 1997. "Patent Litigation as an Information Transmission Mechanism," Discussion Paper 1997-17, Tilburg University, Center for Economic Research.
  10. Schankerman, Mark & Scotchmer, Suzanne, 2001. "Damages and Injunctions in Protecting Intellectual Property," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 199-220, Spring.
  11. Schmalensee, Richard, 1988. "Industrial Economics: An Overview," Economic Journal, Royal Economic Society, vol. 98(392), pages 643-81, September.
  12. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  13. Keith N. Hylton & Sungjoon Cho, 2010. "The Economics of Injunctive and Reverse Settlements," American Law and Economics Review, Oxford University Press, vol. 12(1), pages 181-203.
  14. Reiko Aoki & Jin-Li Hu, 1999. "Licensing vs. Litigation: The Effect of the Legal System on Incentives to Innovate," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 133-160, 03.
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