In many industrial sectors, firms amass large patent portfolios to reinforce their bargaining position with competitors. In a context where patents have a pure strategic nature, we discuss how the presence and effectiveness of a patent system affect the technology decisions of firms. Specifically, we present a game where firms choose whether to agglomerate (i.e. develop technologies for the same technological territory) or to separate (i.e. develop technologies for different territories) prior to taking their patenting decisions. We show that strong patents may distort technology choices causing firms to follow inefficient technology trajectories in an attempt to reduce their competitors’ patenting activity. We also discuss how such distortions change when a firm is prevented from obtaining its optimal number of patents.
