Licensing Probabilistic Patents and Liability Rules: The Duopoly Case

In this paper a dynamic game is used to compare licensing of a cost reduction innovations under lost profits (LP) and unjust enrichment (UE), both damage rules used by courts in the calculation of damages when a patent has been infringed. The innovation, whose property right belongs to a firm (patent holder) has a positive probability to be declared invalid in a court. The market is composed by two homogeneous firms that compete in quantities (Cournot). Licensing by using royalty rates is preferred compared with fixed fees, it is observable little licensing (just big innovations). LP is not always better or worst than UE, but the major of the cases consumers and society are better off under UE and in the major of cases LP benefits more to the patent holder.