In this paper, we revisit the issue of licensing ‘weak’ patents under the shadow of litigation. Departing from the seminal paper by Farrell and Shapiro , we consider innovations of any size and not only ‘small’ innovations, and we allow the number of licensees to be less than the number of firms in the downstream industry. It is shown that the optimal two-part tariff license from the patent holder's perspective may either deter or trigger litigation, and conditions under which each case arises are provided. We also reexamine the claim that the licensing revenues from ‘weak’ patents overcompensate the patent holder relative to what a natural benchmark would command. Finally we suggest two policy levers that may alleviate the harm raised by the licensing of ‘weak’ patents.
The Journal of Industrial Economics, vol. 57, n. 3, September 2009, pp. 492–525