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American Economic Review: Vol. 98 No. 4 (September 2008)

AER Volume. 98, Issue 4 | Previous ArticleNext Article

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How Strong Are Weak Patents?

Article Citation

Farrell, Joseph, and Carl Shapiro. 2008. "How Strong Are Weak Patents?." American Economic Review, 98(4): 1347-69.

DOI: 10.1257/aer.98.4.1347

Abstract

We study the welfare economics of probabilistic patents that are licensed without a full determination of validity. We examine the social value of instead determining patent validity before licensing to downstream technology users, in terms of deadweight loss (ex post) and innovation incentives (ex ante). We relate the value of such pre-licensing review to the patent's strength, i.e., the probability it would hold up in court, and to the per-unit royalty at which it would be licensed. We then apply these results using a game-theoretic model of licensing to downstream oligopolists, in which we show that determining patent validity prior to licensing is socially beneficial. (JEL D82, K11, L24, O34 )

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Authors

Farrell, Joseph (U CA, Berkeley)
Shapiro, Carl (U CA, Berkeley)

JEL Classifications

D82: Asymmetric and Private Information
K11: Property Law
L24: Contracting Out; Joint Ventures; Technology Licensing
O34: Intellectual Property Rights