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PATENT DAMAGES AND SPATIAL COMPETITION

Authors


  • *We thank David Blackburn, Fernando Leiva B, Alan Marco, David Mustard, two anonymous referees and participants at the 2006 Southern Economic Association meetings, the 2007 International Industrial Organization Conference and at the White Plains, NY office of National Economic Research Associates (NERA) for helpful comments.

Abstract

We analyze price competition between a spatially differentiated product patentee and an imitator anticipating probabilistic future patent damages. We compare the performance of three damage regimes. The ‘reasonable royalty’ regime, which yields symmetric equilibrium pricing, maximizes static welfare and yields the highest innovation incentives when patent enforcement is nearly certain. The ‘lost profits’ regime, which may deter infringement, yields the highest innovation incentives when patent enforcement is less-than-certain and products are sufficiently valuable. The ‘unjust enrichment’ regime yields low static efficiency and low innovation incentives. We offer new insights into the ‘hypothetical negotiation’ that courts use to construct reasonable royalties.

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