A study of Patent Thickets (1.31Mb) - UK Intellectual Property Office

A Study of Patent Thickets 37
3 Empirical Methodology
3.1 Methodology to identify entry and exit of firms
In this report, we are concerned with the ability of firms to compete in particular technology
spaces. Therefore we define entry and exit in terms of the patenting behavior of firms rather than
as market entry or survival in a market. In the case of entry, this approach has the advantage of
providing us with a pool of all potential entrants, that is, we also observe those firms that could
have entered a given technology, but chose not to do so. If we were to consider product market
entry, we would only observe the set of firms that entered the market but not the entire pool of
potential entrants, which makes a study of entry impossible.
In addition, linking the analysis of market entry in a specific market context to patenting activity
requires a great deal of work on linking patents to products and product markets. We are not
aware of any research that contains this kind of analysis at the level of an entire patent system.
For this reason we limit our analysis to entry into patenting activity, which is a reasonable proxy
for a firm’s ability and desire to compete in a certain area. However, looking at entry into patenting
conditional on the firm existing is not able to capture any negative effects of patent thickets on
the creation of new firms, so our estimates are likely to understate the true social impact of this
phenomenon.
3.2 Methodology for the measurement of patent
thickets
In this section we discuss a number of ways in which economists have sought to quantify the
extent of patent thickets. Some of these measures have also been used to identify effects of
patent thickets for different types of patent applicants.
The main problem that patent thickets create for firms are the costs of adequate patent search,
the ability to identify all relevant technology, and the consequent threat of hold-up ex post, even
if adequate due diligence has been done. This problem is most likely to arise for firms producing
and selling products that use a complex technology, for instance the producer of a mobile
phone. Such a firm cannot effectively ensure that its products do not infringe on patents granted
to another firm, because there are usually very many relevant patents (Shapiro, 2000), because
the claims in these patents are not always precise (Bessen and Meurer, 2008; Lemley and
Shapiro, 2007) and because it is increasingly in the strategic interest of some applicants to hide
their applications within the system for as long as the rules allow (Hegde et al., 2009), leading
to uncertainty over exactly which patents and claims will be granted in the end.
Therefore, a measure of patent thicket density measuring the hold-up potential existing in
different parts of the patent system is needed. In the early literature on patent thickets these
were identified using qualitative techniques such as interviews (Hall and Ziedonis, 2001). Both
in this paper and in Hall (2005) changes in the number of patent applications that are the result