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

Chiou, Jing-Yuan and Schmidtke, Richard Revisiting Antitrust Limits to Probabilistic Patent Disputes: Strategic Entry and Asymmetric Information. Working Paper (Unpublished)

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Abstract

We consider separately strategic entry and asymmetric information in the design of the settlement policy governing patent disputes, with a focus on Shapiro (2003)’s 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 is preferable to the patent-holder and may lead to higher 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.

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