Strategic patent breadth for drastic innovations
Patents are one of the most powerful forms of intellectual property protection and have been used for the last 500 years as a mechanism to stimulate the production and enable the dissemination of technological knowledge. Patents enable innovators to capture innovation rents through the granting of exclusive rights on their innovations for a pre-specified time period. The degree of appropriability of innovation rents enabled by a patent is determined, to a large extent, by the scope/breadth of the patent protection. In general, broad patent protection relaxes short-run competition in a market but it also increases the likelihood of a patent challenge and/or invalidation. Despite the recognition that patent breadth has a negative effect on the likelihood of a patent remaining valid after it is granted, the standard assumption in the economics literature is that innovators attempt to maximize the returns from an innovation by claiming the broadest scope of patent protection possible. However, given that patent breadth is routinely challenged, the question arises as to whether the innovator, in an attempt to maximize the returns from the innovation, will choose the maximum patent breadth possible. The purpose of this dissertation is to examine the optimal patent breadth strategy that an innovator should employ when faced with the possibility that the patent breadth claimed will be challenged. Specifically, the study argues that innovators of drastic product or drastic process innovations will not always choose the maximum patent breadth possible. Instead, in an effort to earn the maximum possible rents from the innovation, innovators will choose a patent breadth that is, in most cases, less than the maximum possible. The dissertation uses a game theoretic approach to explicitly model the innovator's profit-maximizing patent breadth decision in two different situations - one in which the innovator has discovered a drastic product innovation and one in which the innovator has discovered a drastic process innovation. In both cases the innovator faces the possibility of infringement and/or a direct patent validity challenge. Analytical results show that, contrary to what is traditionally assumed, it is not always optimal for the innovator to claim the broadest scope of patent protection. Instead, the strategic determination of optimal patent breadth involves a trade off. On the one hand, a broad patent protection increases the innovator's expected short-run returns by making it harder for competitors to enter his market without infringing the patent. On the other hand, a broad patent protection puts the viability of the patent at risk by increasing the probability that the patent will be infringed, that its validity will be challenged and that the courts will invalidate the patent or narrows its scope. Generally, this trade off implies that the innovator will choose a patent breadth that is less than the maximum possible. Under certain conditions, this less-than-maximum patent breadth will deter entry - however, deterring entry might not always be a profit-maximizing strategy for innovators. The results of the game theoretic models are also used to develop the framework for an empirical model that could be used to examine the patenting behavior of innovators in different industries. While the empirical model is not estimated, the discussion in the dissertation indicates that estimation of the determinants of the patent breadth behavior is feasible and could be undertaken as a part of future research. Understanding the factors that, influence the determination of the optimal breadth of patent protection for the innovator and the effect of these factors on the profit-maximizing patent breadth may enable innovators to secure strong and viable patents. Holding strong and viable patents is particularly important for research intensive and innovative industries (i.e., biotechnology), where the ability to appropriate innovation rents is crucial for covering high research costs and guaranteeing further investment in the field.