| Abstract: |
We study the blocking effect of patents on follow-on innovation by others. We
posit that follow-on innovation requires freedom to operate (FTO), which firms
typically obtain through a license from the patentee holding the original
innovation. Where licensing fails, follow-on innovation is blocked unless
firms gain FTO through patent invalidation. Using large-scale data from
post-grant oppositions at the European Patent Office, we find that patent
invalidation increases follow-on innovation, measured in citations, by 16% on
average. This effect exhibits a U-shape in the value of the original
innovation. For patents on low-value original innovations, invalidation
predominantly increases low-value followon innovation outside the patentee’s
product market. Here, transaction costs likely exceed the joint surplus of
licensing, causing licensing failure. In contrast, for patents on high-value
original innovations, invalidation mainly increases high-value follow-on
innovation in the patentee’s product market. We attribute this latter result
to rent dissipation, which renders patentees unwilling to license out valuable
technologies to (potential) competitors. |