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Finding "Lost" Profits: An Equilibrium Analysis of Patent Infringement Damages

James J. Anton and Dennis A. Yao
Journal of Law, Economics, & Organization
Vol. 23, No. 1 (Apr., 2007), pp. 186-207
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/4152832
Page Count: 22
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Finding "Lost" Profits: An Equilibrium Analysis of Patent Infringement Damages
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Abstract

We examine the impact of patent infringement damages in an equilibrium oligopoly model of process innovation where the choice to infringe is endogenous and affects market choices. Under the lost profits measure of damages normally employed by U.S. courts, we find that infringement always occurs in equilibrium with the infringing firm making market choices that manipulate the resulting market profit of the patent holder. In equilibrium, infringement takes one of two forms: a 'passive" form in which lost profits of the patent holder are zero and an "aggressive" form where they are strictly positive. Even though the patentee's profits are protected with the lost profits damage measure, innovation incentives are reduced relative to a regime where infringement is deterred.

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