Anne Duchene

Peer-to-peer, piracy and the copyright law: implications for consumers and artists

This innovative and insightful book, written by some of the leading academics in the field, advances research frontiers on intellectual property and copyright issues. Topics addressed include: peer-to-peer music file sharing, optimal fair use standards, the benefits of copyright collectives, copyright and market entry, alternatives to copyright, the impact of copyright on knowledge production, the proper balance between copyright and competition law, and the application of systematic principles to issues that arise at the periphery of intellectual property law – all with an eye toward economics.

Product Market Competition and the Financing of New Ventures

This paper examines the interaction between venture risk, product market competition, and the entrepreneurs choice between bank financing and venture capital VC financing. Under bank financing, a debt-type contract emerges as optimal, which allows the entrepreneur to retain full control of the venture and thus yields strong effort incentives, as long as the entrepreneur can service the debt repayment; however, this leads to liquidation in the case of default, making the ventures success quite sensitive to exogenous, even temporary, shocks that may hinder debt repayment. Under VC financing, an equity-type contract emerges as optimal. Although it is not sensitive to exogenous shocks, this contract requires the entrepreneur to share a fraction of the rents with the financier, thus yielding lower effort incentives for the entrepreneur. There exists a threshold level of venture risk such that bank financing is optimal if and only if venture risk is below that threshold. Product market competition increases the value of stronger entrepreneurial incentives and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank financing to VC financing. This is a robust result that is shown to hold in various models of competition, including the Hotelling, Salop, Dixit-Stiglitz, and Cournot-to-Bertrand switch. This paper was accepted by Lee Fleming, entrepreneurship and innovation.

Patent Settlements as a Barrier to Entry: Patent Settlements as a Barrier to Entry

We formulate a model of entry with two incumbent firms - a patent holder and an infringer - and a potential entrant, with asymmetric information about the validity of the infringed patent (patent strength) between incumbent firms and the entrant. Within this framework we show that patent settlements between the incumbent firms can be mutually beneficial even when the cost of trial is zero and the settlement agreement takes the form of a simple fixed license fee. For patents of intermediate strength, settlements are a tool for entry deterrence. The two parties agree on a high settlement amount which sends a credible signal to “outsiders�? that the patent is not weak and therefore entry will not be profitable. This provides a novel explanation for the role of settlements and to the recent observation of high license fees negotiated in settlement agreements. It suggests that firms should disclose the settlement amount if they want to keep out further entrants. We also show that even nonreverse settlements that entail only a fixed fee can be anticompetitive because they are used to block entry.

Patent Litigation Insurance

Empirical studies have found that high litigation costs often discourage small firms from investing in R&D, as they fear their patent will be infringed and they will not be able to afford litigation. As a solution, firms have been encouraged to purchase insurance policies that, by covering legal costs in the event of a trial, serve as a commitment to litigate so that settlement terms are more favorable to the insured, and potential infringement is less likely to occur. However, very few firms are purchasing insurance and the market remains poorly developed throughout the world. I show that firms might be discouraged from buying insurance because of information asymmetries, not only with insurance companies but also with their competitors. I study the situation of a patent holder, who perfectly knows the validity and enforceability (“strength”) of her patent, which has been infringed by a competitor with less information on the patent. The patent holder can purchase insurance to have a credible threat to litigate and increase the infringers settlement offer. But the decision to buy insurance conveys information about the patent strength to the infringer. As a result the patent holder may prefer not to be insured rather than transmitting this information. This signaling effect can yield different equilibriums, in particular, a pooling equilibrium “no insurance” where no patent holder purchases insurance. I study if this situation might be improved by imposing mandatory insurance or by giving the insurer a share of litigation proceeds.