We consider separately strategic entry and asymmetric information in the design
of the settlement policy governing patent disputes, with a focus on Shapiro (2003)’s
consumer protection rule. We show that, when a potential entrant strategically incurs
an entry cost before engaging in a patent dispute, a more stringent settlement policy
of deterring costly entry is preferable to the patent-holder and may lead to higher
static efficiency. Concerning asymmetric information, when the disputants, but not
the court, learn the patent validity, we derive an “expectation test,” which requires
that a laxer settlement policy be coupled with higher expected patent validity under
settlement