Abstract
We study the effect of patent royalty damages on social welfare in an entry model of quantity competition. We show that fixed royalties are more effective than per-unit royalties in mitigating the inappropriability problem and promoting social welfare. Intuitively, per-unit royalties help overcome the over-entry problem only by distorting downstream competition, while fixed royalties do not. Welfare-optimal fixed royalties reflect the well-known business stealing effect of market entry. Such royalties may be useful in designing minimums for courts to use when determining reasonable royalties.
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