Economics of the Independent Invention Defense under Incomplete Information

Murat C. Mungan

Supreme Court Economic Review, 2012, vol. 20, issue 1, 183 - 203

Abstract: Patents lead to ex post deadweight loss arising from a noncompetitive market structure for the invention. Many have argued that introducing independent invention as a defense (IID) to patent infringement can increase social welfare by decreasing such deadweight loss at the price of a modest decrease in the number of inventions. This paper considers the effects of IID in a setting where R&D firms have incomplete information about their rivals. Four main results follow under incomplete information: (i) fewer things are invented under an IID regime; (ii) IID's effects on welfare are ambiguous; (iii) IID is more likely to increase welfare if gains from competition in the product market are high; and (iv) determining precise conditions under which IID performs better than the current regime requires access to data that are extremely hard to find and quantify.

Date: 2012
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