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The existing patent literature suggests that the patent breadth is an important factor in determining the innovator’s patent licensing and litigation behavior and that licensing a patent to a competitor is driven by profit. The present study develops two economics experiment to investigate these assumptions.
First, a choice experiment is developed to investigate the patentee’s objective when licensing her innovation, by examining whether, when the decision to license is made, the patentee maximizes profits or her strategy is to maintain a dominant market position by controlling the largest market share. The results show that the assumptions of profit maximization and licensing to weak competitors in an effort to leave strong competitors out of the market are not always true. Rather the innovator’s incentives concerning patent licensing depend on the market structure and the innovator’s beliefs regarding existing rivals.
A second interactive experiment is developed to investigate the effects of the breadth of patent protection and the cost structure of a potential licensee on an innovator’s decision to license her patent and to litigate under infringement as well as on the likelihood of a patent challenge under six different market conditions. The likelihood of licensing occurrence is affected by the patent breadth and the nature of the potential entrant under specific market conditions. The likelihood of an innovator making the decision to offer a license is found to be greater with broad patents regardless of the type of the potential entrant. The likelihood of patent challenge is found to be greater with a broad rather than a narrow patent and when no licensing offer is made by either the patentee or the potential entrant. Also, a weak rival is more likely to challenge a patent than a strong rival. Finally, the likelihood of an innovator invoking an infringement trial is greater when she holds a narrow patent, as suggested in the patent litigation literature, and when she faces a strong rival.