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Finding 'Lost' Profits: An Equilibrium Analysis of Patent Infringement Damages

James J. Anton and Dennis A. Yao

Journal of Law, Economics and Organiztion, Vol. 23 (1):186-207, April 2007

Abstract: We examine the impact of patent infringement damages in an equilibrium oligopoly model of process innovation where the choice to infringe is endogenous and affects market choices. Under the lost profits measure of damages normally employed by U.S. courts, we find that infringement always occurs in equilibrium with the infringing firm making market choices that manipulate the resulting market profit of the patentholder. In equilibrium, infringement takes one of two forms: a ``passive''\ form in which lost profits of the patentholder are zero, and an ``aggressive'' form where they are strictly positive. Even though the patentee's profits are protected with the lost profits damage measure, innovation incentives are reduced relative to a regime where infringement is deterred.