Collusion and entry deterrence in a patent-thicket industry∗

When patent standards are low and almost any relevant technol-ogy is not likely to be covered by a single patent, firms may create precautionary patent portfolios. This gives rise to the patent thicket problem: firms have to deal with innumerous uncertainties or negoti-ations in order to develop a new product or technology. We build a simple repeated game model that shows how the patent thicket may allow incumbent firms to keep away the competition through litigation threats. The model displays a subgame perfect equilibrium where in-cumbents are cooperative towards each other, but aggressive towards potential entrants. Several technologies can be covered by a single patent. That is the reality of most technologies in the pharmaceutical and chemical industries. However, this is not the case of the software industry and possibly some other high-technology sectors. In these industries, a given technology is likely to be ∗Revision 98. Latest version a