Patent privateering, litigation, and R&D incentives

Publication Type:
Journal Article
RAND Journal of Economics, 2017, 48 (4), pp. 1004 - 1026
Issue Date:
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© 2017, The RAND Corporation. We model “patent privateering”—whereby producing firms sell patents to Patent Assertion Entities (PAEs), which then license them under the threat of litigation—in a bargaining game. PAEs can negotiate higher licensing fees than producing firms because they cannot be countersued for infringement. Privateering produces two countervailing effects: it increases the offensive value of patents, whereas it decreases their defensive value and lowers the aggregate surplus of producing firms. Embedding the bargaining game into a Research and Development (R&D) contest for multiple complementary technologies, we find that privateering may increase R&D investments, even as it induces more litigation threats and reduces industry profits.
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