Pricing Patents through Citations

This paper provides formal treatment to the idea of patenting as a form of market stealing between R&D firms. It extends the creative destruction literature by allowing innovations to build off each other forming a network of ideas. Patent citations keep track of this network. The theory maps the distribution of productivities in the development of new ideas onto the distri-bution of patent values through patent citations. If productivities are drawn from a Pareto-Levy distribution then the distribution of patent values also falls within this class. The theory is then applied to data on US patent cita-tions. Model-based valuations support the assumption of Pareto distributed productivities. As an added feature, model-based valuations outperform cita-tion counts (the traditional measure) as a proxy for patent values