Essays on the law and economics of intellectual property

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School of Business | Doctoral thesis (article-based) | Defence date: 2006-11-06
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[228] s.
Acta Universitatis oeconomicae Helsingiensis. A, 282
This dissertation consists of four essays on the law and economics of intellectual property (IP). The first essay deals with trade secret law. The second and third essays consider specific patent doctrines in models of sequential innovation. The fourth essay is a comparative analysis of the incentive properties of different IP regimes when innovation is cumulative. The first essay investigates how the combination of damages and criminal fines, which sanctions the misappropriation of a trade secret through bribery, affects the incentives to innovate and imitate. Counterintuitively, the trade secret owner’s payoff can decrease when the criminal fine increases. It is always possible to design a socially optimal trade secret law which sets the criminal fine equal to zero. Bribery can be socially optimal. In that case, trade secret protection is ensured by a strictly positive level of damages which differs depending whether the imitator can or cannot reverse-engineer the innovation. The second essay analyzes the role of the doctrine of estoppel in a model of sequential innovations. The first innovation is patented and the following one infringes the patent (for example, it is an application to another industry of the patented innovation). The doctrine punishes a patentholder who threatened to sue an infringer and then remained silent for a while before enforcing her patent: the patent may be unenforceable. In the model, the patentholder can enforce her patent before or after the infringer has developed his innovation. Counterintuitively, the doctrine can make the infringer worse off, though it is designed to protect him. Also, the doctrine can induce more delay in litigation, though it punishes delays. Under specific circumstances, the doctrine of estoppel can be treated as a new instrument of patent policy aimed at reducing the hold-up problem. The effect of patent validity on players’ welfare and on the equilibrium outcome is also analyzed. The third essay considers the doctrine of laches, again in a context of sequential innovations. Like the doctrine of estoppel, the doctrine of laches punishes a patentholder who delayed enforcing her patent. But this doctrine does not require an initial threat of litigation followed by a period of silence, and the patent remains enforceable. However, the patentholder cannot collect damages to compensate her for infringement that occured during the period of delay. The analysis incorporates uncertainty about the profitability of the 1 follow-on innovation. Hence, both the timing of investment in the follow-on innovation and the timing of litigation are endogenized. The doctrine can spur or deter investment in the follow-on innovation. Also, it can speed-up investment or delay it. It can hurt the infringer. The effect of the patentholder’s compensation via damages is also analyzed. An increase in this compensation can speed-up or delay investment in the follow-on innovation and can paradoxically make the patentholder worse off. The fourth essay, a joint work with Klaus Kultti, is a comment of a widely discussed article by James Bessen and Eric Maskin (B&M) (2002). The authors argue than patents can reduce aggregate R&D investment when innovation is cumulative. We extend their model in two directions: we endogenize the level of R&D investment and, beside ”patents” and ”no protection”, we introduce a third IP regime called ”copyright”. We find that when innovation is cumulative, ”patents” always yield more aggregate R&D than ”no protection” (in contrast to B&M). Also, a copyright regime may implement the socially optimal investment by reducing R&D incentives compared to a patent regime
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Ilmakunnas, Pekka, professor
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