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Patent Settlements as a Barrier to Entry
Journal article   Open access   Peer reviewed

Patent Settlements as a Barrier to Entry

Anne Duchene and Konstantinos Serfes
Journal of economics & management strategy, v 21(2), pp 399-429
01 Jun 2012
DOI: https://doi.org/10.1111/j.1530-9134.2012.00335.x
url
http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.551.1715View
SubmittedOpen Access (License Unspecified),  Open

Abstract

Business & Economics Economics Management Social Sciences
We formulate a model of entry with two incumbent firmsa patent holder and an infringerand a potential entrant, with asymmetric information about the validity of the infringed patent (patent strength) between incumbent firms and the entrant. Within this framework we show that patent settlements between the incumbent firms can be mutually beneficial even when the cost of trial is zero and the settlement agreement takes the form of a simple fixed license fee. For patents of intermediate strength, settlements are a tool for entry deterrence. The two parties agree on a high settlement amount which sends a credible signal to outsiders that the patent is not weak and therefore entry will not be profitable. This provides a novel explanation for the role of settlements and to the recent observation of high license fees negotiated in settlement agreements. It suggests that firms should disclose the settlement amount if they want to keep out further entrants. We also show that even nonreverse settlements that entail only a fixed fee can be anticompetitive because they are used to block entry.

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Economics
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