An Economic Model of Patent Exhaustion

Olena Ivus, Edwin Lai () and Ted Sichelman

No 6638, CESifo Working Paper Series from CESifo

Abstract: The doctrine of patent exhaustion implies that the authorized sale of patented goods “exhausts” the patent rights in the goods sold and precludes additional license fees from downstream buyers. Courts have considered absolute exhaustion, in which the patent owner forfeits all rights upon an authorized sale, and presumptive exhaustion, in which the patent owner may opt-out of exhaustion via contract. This paper offers the first economic model of domestic patent exhaustion that incorporates transaction costs in licensing downstream buyers and considers how the shift from absolute to presumptive exhaustion affects social welfare. We show that when transaction costs are high, the patent owner has no incentive to individually license downstream users, and absolute and presumptive exhaustion regimes are equivalent. But when transaction costs are at the intermediate level, the patent owner engages in mixed licensing, individually licensing high-valuation buyers and uniformly licensing low-valuation buyers. Presumptive exhaustion is socially optimal when social benefits from buyer-specific pricing outweigh social costs from transaction cost frictions in individualized licensing, which requires sufficiently low transaction costs.

Keywords: intellectual property; patent exhaustion; first sale doctrine; patent licensing (search for similar items in EconPapers)
JEL-codes: F10 O34 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ino, nep-ipr and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: An economic model of patent exhaustion (2020)
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