Effects of patent privateering on settlements and R&D under sequential market entry

Abstract

We investigate patent litigation, settlements and R&D incentives on a market where two firms develop technologies in order to obtain patents and produce goods. Firms may sell IP rights to a Patent Assertion Entity (PAE) that acts as intermediary for patent monetization. We find that compared to simultaneous market entry, the effect of this so-called patent privateering is mitigated if firms enter sequentially. Furthermore, we show that privateering may decrease industry profits by distortion of R&D incentives even when there is no rent extraction by the PAE.