Patent Valuation and Strategy

Surprisingly, the very simple Patent Game illustrated above reveals how strategic analysis can be complex for just two firms competing in patent-dependent markets. The Incumbent firm naturally will consider patenting an innovation. But the Entrant to the product market must decide to enter or not, depending on knowledge it has of Incumbent's patent status and its assessment of the payoffs from staying put and from entering. But if Incumbent sees a new Entrant, it in turn must decide to sue or not, which further leads to a random result: winning or losing in court. This random factor requires a probability assessment. Effective analysis of this situation requires strategic thinking about the various possible payoffs, which in turn relies upon strong industry, technology and competitive skills.

This Patent Game illustrates how economic valuation of patents is a crucial aspect of full strategic analysis.

For patent transactions, negotiation analysis depends on the specific circumstances. In all cases, the essential methods are to consider comparable transactions to the degree they can be found, and to analyze strategic options for the economic use of the patents (as illustrated above). These approaches require knowledge of the industry and technology, and experience negotiating deals.

For information on how we formally generate strategic options, see

Strategic Scenario Generation.

Here is a brief presentation on our approach to

Valuing Patents.