Credibility and Credulity: How Beliefs about Beliefs affect Entry Incentives
by Alan C. Marco and Kieran J. Walsh (November 2006)
In this note we investigate the infringement (entry) decision for a firm facing an incumbent patent holder with uncertain patent rights. The entrant risks a dispute by entering, resulting in either a settlement (licensing) or litigation and trial. Using the litigation model described by Priest and Klein, we investigate the expected dispute resolution and its impacts on the entrant’s pre-dispute behavior. The primary contribution is to show that the entrant’s expectations about the patent holder’s beliefs about patent enforceability are a driving factor behind the entry decision. We develop a simple taxonomy of entrant and incumbent types to explain the entry decision.
Keywords: patents, uncertainty, entry, patent litigation, patent infringement. JEL codes: L19, L29, O32, O34, K41