Patent Litigation when Innovation is Cumulative

This paper studies the effect of litigation as a way to enforce patents when firms hold private information. Patent protection granted by courts affect the entry, settlement and litigation decisions of future innovations. The model is broadly consistent with recent empirical evidence. We show that higher protection might be detrimental to the patentholder since it reduces entry of infringers that would otherwise license the patent. We argue that this is more likely to be the case for large improvements or large litigation costs. Finally, we compare the effects of Preemptive Injunctive Relief on innovation and litigation. JEL Classification: D23, K41 and 034.