Imperfect patent protection and licensing: a theoretical model

We extend the literature on licensing, introducing imperfect patent protection. We present a theoretical model where an innovator may license a more efficient technology to an incumbent. Because of imperfect patent protection, the incumbent may imitate the technology with a non-negligible probability to not be convicted. We prove that the introduction of imperfect patent protection reduces the values of both exclusive and sole licenses, making in some cases the latter more profitable for the licensor. As a consequence, on the one hand, the threat of imitation boosts the innovator in the market enlarging the number of firms that operate in the market with the efficient technology, and increasing the allocative and (static) productive efficiency; on the other hand, the same threat reduces the innovator’s expected R&D returns, negatively affecting the ex-ante incentive to innovate, and the dynamic efficiency of the market.