Patent Assertion and the Rate of Innovation

We analyze the effect of Patent Assertion Entities (PAEs) on the innovation incentives of producing firms. Before producing, these firms engage in sequential patent races to discover and patent the components needed for the final product. We characterize the equilibrium of a model that incorporates patent trade, entry, licensing, litigation, and injunctions. In our model, only producing firms can obtain injunctions, which reduces the incentives of producing firms to sell patents to PAEs, because the latter cannot exclude rival firms from the market. We show that PAEs can increase the marginal value of patenting a discovery, but they can also act as an entry deterrent. As an extension, we study patent trade among producing firms and a third party that can decide to enter the market and produce.