Patent Licensing and Litigation

Abstract This paper analyzes the impact of imitation and court efficiency on firms’ licensing and litigation strategies regarding patented technologies. It examines imperfect imitation and the limitations of patent protection, which is not absolute. The findings suggest that a high-cost firm should buy a license from a low-cost firm in the same industry before pursuing imitation for a minor technological innovation when the firms compete in quantities a la Cournot. Conversely, if the innovation is substantial, licensing after imitation becomes the dominant strategy. Furthermore, whether litigation goes to trial depends on the size of the damage award and the extent to which the litigants can influence the court. Interestingly, a patent holder may benefit from choosing not to act against a highly imperfect imitation.