Weak Patents, Threat of Litigation and Tacit Collusion

In recent years, the increasing awarding of weak patents has captured the attention of scholars operating in different fields. Weak patents are patents that are not clearly invalid: they cover secondary aspects of an invention and, if litigated, may be invalidated by a court. Patents should grant monopoly power, weak patents just give stochastic protection. In this context, we show how an incumbent may create a weak patent portfolio in order to control market entry, and eventually to collude. In our model, the incumbent fixes the level of patent protection and the threat of denunciation reduces the entrant’s expected profits; moreover, if the entrant deviates from collusion, the incumbent can strengthen punishment suing her for patent infringement, reducing the entrant’s incentive to deviate. Our analysis suggests that, in the presence of weak patents, antitrust authorities should pay attention to the level of patent protection implemented by the incumbent and note whether the holder of a patent reacts to entry by either suing or not suing the competitor.