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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Economic Modelling, Volume 28, Issue 3, May 2011, Pages 1186–1194
Incorporating patent litigation into a durable-good duopoly model, we revisit the optimal licensing contract on a cost-reducing innovation. We find that both the optimal licensing contract and the innovator's licensing revenue are closely related to the patent's strength, i.e., the probability it would be found valid if tested in court. It is shown that, for a relatively weak patent (patent's strength is low), it's optimal for the innovator to charge the royalty rate as high as possible coupled with a negative fixed fee. But for a relatively strong patent (patent's strength is high), contract involving the combination of a medium level royalty rate and a positive fixed fee is optimal. We also discuss how the patent's strength affects the social welfare of a patent. Finally we present two policy suggestions that may alleviate the social welfare loss raised by the licensing of weak patents.
Total patent application number in China has grown almost exponentially. For example, from the statistical data of State Intellectual Property Office of the People's Republic of China, the patent application number is 9411 in 1985, which increases to 170,682 in 2000. According to the latest figures, it climbs up to 976,686 in 2009. At the same time, the patent litigation number is also on the rise from 347 in 1985 to 5148 in 2000 and it has added up to 30,509 in 2009.1 In the United States, for example, since the 1990s the growth rate of patent prosecution cases has surpassed 100%. The US Patent and Trademark Office (PTO) has issued roughly 15,000 patents a month, but the patent examiner time of an average application is only about 15–20 h.2 Since there are so many patent applications in every year, it's impossible for the State Intellectual Property Office of the People's Republic of China or PTO to get through with a thorough assessment procedure for every patent application due to the information and cost constraints. Therefore, licensing of patented technology often inevitably occurs in the shadow of patent litigation, that is, the patent is uncertain and it may be held invalid by a court if litigated. However, the existing formal licensing literature has focused on the certain patent (the so-called ironclad patents). Patent licensing is a commonly used practice. Licensing of patented technology is becoming more and more important in technology transfer for many developing countries and industrialized countries. Appropriating licensing revenue is an effective way for the innovator to compensate for his R&D expenditures in technology innovation activities. Furthermore, licensing can serve as a way of financing for financially constrained firms (Gompers and Lerner, 1999, Hall, 2002 and Kulatilaka and Lin, 2006). Although we believe that a lot of scholars offer valuable insights into patent licensing, it is surprising that there is little theoretical guidance on durable-good licensing. In reality, however, licensing involves many durable-goods, such as computers, cars and mobile phones, for example, 3G licensing case in Hong Kong (more detail see Xu, 2004). So far few literatures feature both durable-good and patent litigation. This paper specifically builds a parsimonious model of patent licensing that integrates both of these important features largely unexplored in the literatures. We argue that many real-life license contracts are similar to the situation described here. We set up a licensing model involving an outside innovator and two competing firms which play a simultaneous two-period game. Our paper is related to Paul and Poddar (2000) and Poddar (2004) in treatment of durable-good duopoly, which emphasizes the strategic choice between renting and selling, showing that selling turns out to be the unique dominant contract of the firms. In contrast, we lay stress on the arrangements of licensing contracts in the presence of patent litigation. The innovator can choose from fixed fee, royalty rate or their combination to maximize his licensing revenue, while the two firms compete against each other in outputs in both periods to maximize total individual profit. The patent strength turns out to have a crucial impact on the licensing strategy. This paper departs from the traditional licensing literatures in three ways. First, we consider the licensing of durable-good. Second, we conduct a study of patent litigation risk, and its role in licensing. Third, we allow negative fixed fee and royalties, so the innovator has access to a broad set of licensing arrangements. The main results in this paper are as follows. We argue that the innovator will strike a balance between a firm's expected profits of triggering patent litigation and the firm's net profits of joining up to a licensing agreement. From the innovator's perspective, the optimal combination of fixed fee and royalty rate depends on the patent strength. More specifically, for a relatively weak patent, it is optimal for the innovator to charge the royalty rate as high as possible connected with a negative fixed fee (the innovator pays the licensee a lump sum subsidy). But for a relatively strong patent, contract involving the combination of a medium level royalty rate and a positive fixed fee is optimal. We also discuss the society welfare and licensing policy of weak patents. For relatively strong patents, the license contract involving unrestricted two-part tariffs leads to an overall improvement in the society's welfare, whereas for relatively weak patents, this leads to an overall inducement in the society's welfare. In order to improve the society's welfare of relatively weak patents, we present two policy suggestions: taking the case of the innovator and the unsuccessful challenger attempting to agree on a renegotiated per-unit royalty rate and allowing a collusive scheme.
نتیجه گیری انگلیسی
So far few literatures feature both durable-good and patent litigation. This paper specifically builds a parsimonious model of patent licensing that integrates both of these important features largely unexplored in the literatures. We argue that many real-life license contracts are similar to the situation described here. The litigation-related considerations have a crucial impact on patent licensing. We have showed that both the optimal licensing contract and the innovator's licensing revenue are related to the patent's strength. Our analysis also reveals that, from the viewpoint of the innovator, the optimal combination of fixed fee and royalty depends on the size of the patent strength. Charging the royalty rate as high as possible coupled with a negative fixed fee is optimal for relatively weak patents, while the optimal contract involves a medium level royalty rate plus a positive fixed fee for relatively strong patents. We also discuss the social welfare and policy implications of the licensing process of weak patents. For relatively strong patents, the license contract involving unrestricted two-part tariffs leads to an overall improvement in the society's welfare, whereas for relatively weak patents, this leads to an overall inducement in the society's welfare. In order to improve the licensing efficiency of relatively weak patents, we present two policy recommendations: the first is that the innovator and the unsuccessful challenger attempt to agree on a renegotiated per-unit royalty rate. We show that this policy will be to reduce the level of the per-unit royalty acceptable by all firms. This is equivalent to reduce the marginal cost of produce and to increase the firm's output in competitive case. Thus, this policy recommendation will be to increase the social welfare. The second policy is to allow collusive scheme. We argue that collective suits can rule out the free-riding problem that arises in the case that suit is made individually. So it can eliminate the possibility of the innovator charging a per-unit royalty rate that exceeds the benchmark level. Therefore, the second policy will also be to increase the social welfare. We admit that there are a few limitations of the model analyzed here. First, litigation cost has been ruled out in our model. In reality, however, this seems to be a natural situation.9 As a result, there is an under-incentive for the potential licensee to bring suit in the privately borne cost of litigation, which may have an impact on the type of the contract that must be used. Moreover, cost-related considerations will make the bargaining process between the innovator and potential licensee more complex. Our second limitation is that the patent's strength θ is treated as exogenously given, as we assumed. In general, the innovator has the private information about the patent's strength θ (whether patent is weak or strong) whereas the licensee has only a prior belief about it, and hence faces the adverse selection problem. These issues will be a fertile area for future work.