How Reliable Is the Market for Technology?

Abstract

Considerable research has considered why and when firms may choose to access the market for technology. However, in the case of licensing little is known about the reliability of these external patents. In the case of litigation, ‘weak’ external patents can expose a firm to the loss of a protected revenue stream. In some industries, such as pharmaceuticals, where development cycles are long, the loss of a revenue stream due to litigation can be a significant event. While studying this industry we focus on a unique legal action called a “Paragraph IV challenge.” This setting offers a natural experiment to test whether external technologies are more reliable than those developed internally. We find that acquired patents are more reliable then internal technologies. We also show that more profitable drugs have a higher probability of being challenged and that the 2003 Medicare Modernization Act lowered litigation costs, thus, increasing the likelihood of a challenge.