Economic Analysis of Business Practice
The inventor and the assignee of this patent have no intention of applying the techniques described herein offensively but instead intend to use the patent defensively to discourage patent trolls and the like from extortionist practices.
Drawing from the three basic strategies that firms can use to stay ahead of competitive forces, the third strategy – reducing competitive intensity – echoes similarities to patent trolling. In attempts to reduce competitive intensity and defend themselves, firms can either chose to discourage potential market entrants with a pre-entry strategy or try and squeeze competitors out of the market with a post-entry strategy. A recent study suggests that the effectiveness, efficiency and superiority of either strategy depends upon product and market characteristics, the product-life-cycle, and the incumbent firm’s ability to influence competitors by causing them to pursue less threatening goals that do not risk the incumbent’s long-term survival in the market (Homburg et. al, 2013). “While both strategies turn out to be viable options for market defense, the authors find that in general, a shakeout strategy tends to be superior to a deterrence strategy. However, the authors also identify product and market conditions under which an established firm is better off focusing on a deterrence strategy (Homburg et. al, 2013).” The study concludes that deterrence is the superior option when the product-life-cycle is long and the probability of influencing a new competitor is low, but a shakeout strategy is the optimal (less costly) alternative when industry conditions present a short PLC and established firms’ are likely able to influence new entrants toward less attractive market segments or niches.Reference:Homburg, C., Fürst, A., Ehrmann, T., & Scheinker, E. (2013). Incumbents' defense strategies: A comparison of deterrence and shakeout strategy based on evolutionary game theory. Academy of Marketing Science.Journal, 41(2), 185-205. doi:http://dx.doi.org/10.1007/s11747-011-0299-5
I would agree as Froeb notes that one way to reduce competitive intensity is to make entry into a particular market or industry difficult. Michael Porters five forces suggest that industry attractiveness evaluated based on threat of entry, supplier power, buyer power, degree of rivalry, and threat of substitutes. Here, the discussion on patents particularly addresses the force threat of new entrants. Considerations for threat of new entrants or barriers to entry include: Absolute cost advantages, Proprietary learning curve, Access to inputs, Government policy, Economies of scale, Capital requirements, Brand identity, Proprietary products, expected retaliation. (Porters Five Forces) It’s interesting that talks on patents deal with several considerations at once such as government policy, proprietary products, and expected retaliation. When considering strategic games patents take a strategic posture of changing the games so that the advantage lies with the patent holder, which holds to the pursuit of self-interest by creating a barrier to entry. The patent move is preemptive rather than a reactionary move, which make it more costly for competitors to engage in strategic games with patent holders.