Bargaining in the shadow of precedent: the surprising irrelevance of asymmetric stakes

Abstract

We develop a model of bargaining and litigation in the context of patent licensing (or any contractual setting). Following Priest and Klein (1984) we developed a model that explicitly allows for (1) multiple parties (leading to asymmetry of stakes), (2) binding precedent, and (3) pre-dispute bargaining done in the “shadow” of precedent-setting courts. The pre-dispute bargaining creates an endogenous opportunity cost of litigation for both plaintiff and defendant; i.e., the harm is endogenous. We show that the effects of asymmetric stakes on the litigation rate and plaintiff win rate are offset by opportunity costs (forgone licensing). That is, the degree of asymmetry does not appear to substantially impact the rate of litigation or the observed win rate of plaintiffs at trial. This result is in stark contrast to the previous theoretical literature, and has implications for interpreting the empirical literature.