Signalling the Value of an Innovation by (not) Litigating Patent Infringers

We examine whether litigating or not litigating other firms who enter a market and infringe an existing patent for a previous innovation can signal the value of the patent. Without entry deterrence patent holder will litigate, if its expected costs exceeds its expected benefits. However, despite avoiding litigation costs, the patent holder might be able to credibly signal a low value of a patent and deter further entry into its market by not litigating a firm which infringes its patent. We will derive in general which conditions must be satisfied for this to happen and present some more specific examples.