Patent Thickets: Licensing and Optimal Patent Protection

Recent theories suggest that stronger patent protection can discourage R&D investments by worsening the hold-up problem among complementary patents. This contrasts sharply with the traditional models of patents. This paper attempts to integrate the traditional models with the new theories, and to provide systematic policy implications. If efficient licensing contracts are available, stronger patent protection always encourages R&D investment regardless of the complementarity of patents. Moreover, firms always under-invest in R&D, compared with the social optimum. Therefore, even with complementary patents and hold-up problems, an optimal policy direction is relatively simple. A policy maker should encourage licensing contracts and strengthen patent protection.