Patent protection and threat of litigation in oligopoly
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Patent protection and threat of litigation in oligopoly Carlo Capuano1 • Iacopo Grassi2
•
Riccardo Martina3
Received: 17 July 2019 / Accepted: 18 December 2019 Springer-Verlag GmbH Austria, part of Springer Nature 2020
Abstract In a context of imperfect patent protection, this paper analyses the strategic use of patents from a novel perspective; patents are seen as a means available to the incumbent firm to control entry and, more importantly, to influence the post-entry market interaction process effectively, by creating the conditions that favour collusion. The level of patent protection chosen by the incumbent affects the likelihood that a potential entrant will be found guilty of patent infringement. This mechanism can operate as a punishment device that eases the conditions for collusion sustainability. Therefore, in a sense, patent protection can be regarded as an instrument allowing replication of the monopoly outcome in the context of a contestable market. Keywords Patents Patent portfolio Litigation Collusion Foreclosing Entry game
JEL Classification D43 K21 L13
& Iacopo Grassi [email protected] Carlo Capuano [email protected] Riccardo Martina [email protected] 1
Department of Economics and Statistics (DISES), University of Naples Federico II - Complesso Universitario di Monte S.Angelo, Via Cinthia, Naples, Italy
2
Department of Political Science, University of Naples Federico II, Via Rodino 22, 80133 Naples, Italy
3
Department of Economics and Statistics (DISES) and Center for Study in Economics an Finance (CSEF), University of Naples Federico II - Complesso Universitario di Monte S.Angelo, Via Cinthia, Naples, Italy
123
C. Capuano et al.
1 Introduction In 2007, Steve Jobs, CEO of Apple Inc., contacted Ed Colligan, CEO of the now defunct Palm Inc., and threatened Palm with patent litigation unless Colligan agreed not to make unsolicited job offers to Apple employees. This ‘‘no-poaching’’ request was an explicit attempt to suppress competition. In an e-mail to Jobs, Colligan said that the agreement was ‘‘not only wrong, but likely illegal.’’ In response, Jobs told Colligan ‘‘I’m sure you realize the asymmetry in the financial resources of our respective companies’’ and to ‘‘take a look at our patent portfolio before you make a final decision here’’.1 This anecdotal evidence highlights use of the threat of patent litigation as an instrument to enforce a collusive outcome. The traditional economic wisdom considers patents to be an instrument that, in a Schumpeterian perspective (Schumpeter 1942), should grant firms temporary monopoly; however, if this were the case, in industries characterized by relevant R&D expenditures and huge patent portfolios (e.g., knowledge-based sectors), we would rarely see firms entry. On the contrary, the empirical evidence shows that competitors do enter in markets protected by patents, and collusion does emerge among patenting firms. Accusations of collusion have involved companies in highly
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