New empirical research shows patents raise prices across the board

This paper examines empirically the effect of patent protection on the price of an array of consumer products. We collect original data on patent-product associations and study the effect of an exogenous loss of patent protection on product prices. We have matched 2778 patents to 825 products available on the Amazon.com e-commerce website and have tracked the prices of these products for a period of up to eight years. We study the change in price around the time of patent expiry. Because patent protection is limited in time by law, patent expiry is exogenous to the quality of the underlying invention or to its commercial value. Furthermore, we are able to isolate the effect of patent expiry from the effect of product depreciation by controlling for product model displacement and product age. The empirical analysis then explores the heterogeneous effects of patent expiry across patent type and importance. It also portrays the price evolution around the time when patent terms expire. Finally, it considers how prices react to the intensity of the competition in the product market.

We find that patent expiry is associated with a 7-8 percent drop in product prices, and that the effect is larger for more important patents (e.g., patents that claim a broader slice of technology). We observe that the price starts dropping about one year before patent expiry, possibly suggesting strategic entry deterrence from the incumbent (Milgrom and Roberts,1982;Goolsbee and Syverson,2008). We also observe that the decline in price is more pronounced in more competitive markets, with some evidence of a U- shape relationship between the price drop and the level of the competitive pressure. Finally, placebo tests on samples of fake patent expiry events confirm the validity of our identification strategy.