This paper examines innovating firms’ incentives to engage in defensive patenting.
It first establishes a “truce equilibrium” in patent enforcement: when litigation is
costly, the equal strength of two symmetric parties’ patent portfolios deters any patent
disputes along the equilibrium path. This equilibrium behavior generates two benefits
of defensive patenting, namely, to prevent licensing outlays and to protect downstream
investments. In addition, firms can use patents to coordinate non-contractible
investment decisions. Depending on the joint interests, they can either reach a license
in order to guarantee high investment incentives, or agree not to grant a license so
that investments are deterred by the litigation threat. On the other hand, the strategic
patenting concern may generate a bandwagon of patent accumulation, where firms
rush to the patent office to get a patent, but the subsequent investment performance
is the same as when there is no patent at all.
The paper also argues that defensive patenting may weaken the effectiveness of
patents as an appropriation scheme. This offers an explanation that the “pro-patent” policy shift in the United States since the 1980s may actually have undermined the
incentive power of the patent system
