Revisiting Antitrust Limits to Probabilistic Patent Disputes: Strategic Entry and Asymmetric Information

Posted by D. Daniel Sokol

Jing-Yuan Chiou (IMT Lucca Institute for Advanced Studies) and Richard Schmidtke (University of Munich) address Revisiting Antitrust Limits to Probabilistic Patent Disputes: Strategic Entry and Asymmetric Information

ABSTRACT: We consider separately strategic entry and asymmetric information in the design of the settlement policy governing patent disputes, with a focus on Shapiro’s (2003) consumer protection rule. We show that, when a potential entrant strategically incurs an entry cost before engaging in a patent dispute, a more stringent settlement policy of deterring costly entry benefits the patent-holder and may raise static efficiency. Concerning asymmetric information, when the disputants, but not the court, learn the patent validity, we derive an ‘expectation test,’ which requires that a laxer settlement policy be coupled with higher expected patent validity under settlement.