Optimal patent licensing strategy in patent litigation

Abstract

Technology innovators often face an essential, yet troublesome, question: What should they do when they might be unable to market their research results due to financial constraints, while there is still substantial uncertainty around the market demand? And the presence of patent litigation is estimated to have a crucial impact on the licensing scheme, and at the same time changes an innovator' financing decision. We find that in the shadow of patent litigation, optimal ex-post licensing contracts are more likely to use ad valorem royalty when the potential market size is relatively small, whereas relatively large market size favors per-unit royalty. We also explore how ex-ante licensing contract can both dissuade potential licensees from challenging the patent's validity and alleviate the financing problem when firms have financial constraint.