Abstract
We examine the effects of software patents on entry and exit in 27
narrowly-defined classes of software products, using a dataset with
comprehensive coverage of both mature public firms and small privately held
firms between 1994 and 2004. Reflecting the complex economics underlying the
relationship between patent protection, entry costs and industry structure, we
find that patents have a mixture of effects on entry and exit. Controlling for
firm and market characteristics, firms are less likely to enter product classes
in which there are more software patents. However, all else equal, firms that
hold software patents are more likely to enter these markets. The net effect on
entry of increasing the number of software patents is difficult to measure
precisely: estimates of the effect of an across-the-board 10% increase in patent
holdings on the number of entrants into the average market in this sample range
from -5% to +3.5%, with quite large standard errors. Evidence on exit and
survival is consistent with these findings-holding patents appears to enhance
the survival prospects of firms after entering a market.