Innovation in the shadow of patent litigation

We analyze non-cooperative R & D investment by two firms that already hold patents that they can assert against each other with probabilistic success. The market structure results from stochastic innovation and patent litigation. Depending on the level of infringement fees, we highlight positive and negative effects of litigation threats on innovation. We define an appropriate regulatory structure of infringement fees that will implement socially efficient R& D investments in the case of symmetric and asymmetric patent portfolios.