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The Effect of Litigation on Intellectual Property and Welfare

This paper shows that “wasteful” litigation about intellectual property may be welfare enhancing. The aim of an intellectual property protection system is to solve the trade-off between exante innovation incentive and ex-post monopoly welfare loss. The litigation about intellectual property in court decreases the expected rent from intellectual property, therefore reducing the incentive to innovate in the first place leading to a negative effect on social welfare. Yet the legal contest may have the positive welfare effect of breaking the monopoly and allowing an entrant into the market, thus lowering prices and reducing the welfare loss of monopoly. If the welfare effect of increasing competition outweighs the first effect of reduced research, a litigation contest is welfare increasing.

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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0511.

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Date of creation: Dec 2005
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Handle: RePEc:vie:viennp:0511
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  1. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  2. Arye L. Hillman & John G. Riley, 1987. "Politically Contestable Rents and Transfers," UCLA Economics Working Papers 452, UCLA Department of Economics.
  3. Steven Shavell & Tanguy van Ypersele, 1999. "Rewards versus Intellectual Property Rights," NBER Working Papers 6956, National Bureau of Economic Research, Inc.
  4. Lanjouw, Jean O & Schankerman, Mark, 2001. "Characteristics of Patent Litigation: A Window on Competition," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 129-51, Spring.
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  7. Denicolo, Vincenzo, 1996. "Patent Races and Optimal Patent Breadth and Length," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 249-65, September.
  8. Stephen M. Maurer & Suzanne Scotchmer, 2003. "Procuring Knowledge," NBER Working Papers 9903, National Bureau of Economic Research, Inc.
  9. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
  10. Michael R. Baye & Dan Kovenock & Casper G. de Vries, 2000. "Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach," Tinbergen Institute Discussion Papers 00-103/2, Tinbergen Institute.
  11. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-97, September.
  12. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
  13. Nordhaus, William D, 1972. "The Optimum Life on a Patent: Reply," American Economic Review, American Economic Association, vol. 62(3), pages 428-31, June.
  14. Waterson, Michael, 1990. "The Economics of Product Patents," American Economic Review, American Economic Association, vol. 80(4), pages 860-69, September.
  15. Martin Kolmar & & Andreas Wagener, 2012. "Contests and the Private Production of Public Goods," Southern Economic Journal, Southern Economic Association, vol. 79(1), pages 161-179, July.
  16. Gilbert, Richard J & Newberry, David M G, 1984. "Uncertain Innovation and the Persistence of Monopoly: Comment," American Economic Review, American Economic Association, vol. 74(1), pages 238-42, March.
  17. Farmer, Amy & Pecorino, Paul, 1999. " Legal Expenditure as a Rent-Seeking Game," Public Choice, Springer, vol. 100(3-4), pages 271-88, September.
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