Probabilistic Patents

F or many years, economists typically conceptualized patents as well-defined property rights giving their owners either a monopoly over some market or at least a significant competitive advantage in that market due to control over a product improvement or a low-cost method of production (Nordhaus, 1969; Reinganum, 1989). Once a patent was issued, this approach tended to assume that the patent was valid, that it granted a right of definite scope, and that users of the patented technology respected that right or were forced by courts to do so. Treating patents as well-defined rights to exclude rivals has permitted economists to focus on important and complex relationships among patents, innovation, competition and the diffusion of technology. More recently, however, scholars and policymakers have begun to look more closely at the empirical evidence regarding the issuance of patents and patent litigation. Nearly 200,000 patents are issued every year after a very limited examination process. Most issued patents turn out to have little or no commercial significance, which is one reason that only 1.5 percent of patents are ever litigated, and only 0.1 percent of patents are ever litigated to trial. Given these uncertainties, economists have increasingly recognized that a patent does not confer upon its owner the right to exclude but rather a right to try to exclude by asserting the patent in court (Shapiro, 2003a). When a patent holder asserts its patent against an alleged infringer, the patent holder is rolling the dice. If the patent is found invalid, the property right will have evaporated.