The Division of Profit in Sequential Innovation for Probabilistic Patents

Chou Teyu and Haller Hans
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Chou Teyu: Department of Public Finance, National ChengChi University
Haller Hans: Department of Economics, Virginia Polytechnic Institute and State University

Review of Law & Economics, 2007, vol. 3, issue 2, 581-609

Abstract: Sequential innovation with actual patent infringement and uncertainty in litigation is analyzed. Comparative statics shows that within a wide range of model parameters, a basic researcher holding a patent is able to extract all of the profit facilitated by the basic innovation. The patent holder achieves this by offering a licensing contract which the subsequent innovator accepts in the shadow of paying infringement damages. It is further demonstrated that, under rather general circumstances, broader patent breadth may diminish the patent holder's incentive to innovate: that is to extract all of the profit from the subsequent innovator commercializing the innovation.

Date: 2007
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DOI: 10.2202/1555-5879.1164

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