How Big Companies Use Patents to Play Defense

With big companies churning out more and more patents, you might think that bodes well for innovation. After all, each of those bright new ideas could eventually show up as new products or features on store shelves, offering consumers more and better choices. 

But the reality is that many of these patents lie dormant, says Sara Moreira, an associate professor of strategy at Kellogg. Instead of using patents to fuel innovation, large companies often use them as a “defensive tool” to block competitors from developing similar products, she says. 

Moreira collaborated with David Argente at Yale University, Salomé Baslandze at the Federal Reserve Bank of Atlanta, and Douglas Hanley, formerly at the University of Pittsburgh, to analyze data on roughly 1.4 million products while matching them to patents. The researchers found that patents are generally linked to the introduction of new products—but far less so at large firms than at smaller ones.   

The likely reason, according to the researchers’ mathematical model, is that dominant firms often gain more from protecting their market position than from commercializing new inventions. The unfortunate result for consumers is that they end up waiting a long time to enjoy the fruits of these large firms’ R&D efforts, if they ever get to enjoy them at all.   

Ultimately, this behavior doesn’t serve the economy well. If companies are allowed to withhold potential innovations from the market indefinitely, “we are dependent on when or if they think it’s a good idea” to introduce them, Moreira says, while patent rights prevent competitors from bringing similar ideas to market.   

The other 99 percent   

The team’s original motivation for their study was to find a better way to measure innovation. In the past, researchers often used patents as a proxy.   

But in the United States, only a tiny fraction of firms file patents. For instance, in 2022, less than 1 percent of companies were granted a patent for products, machines, or processes. That statistic raised a red flag. “It cannot be possible that only 1 percent of firms are innovating,” Moreira says. 

The researchers analyzed barcode scanner data for products in the consumer- goods space, including categories such as food, bathroom products, appliances, and gardening supplies, from 2006 to 2015. They used text-analysis tools to match descriptions of product categories to patents listed in the U.S. Patent and Trademark Office. For example, they matched a patent for water-soluble film to Tide Pods laundry-detergent packs, and Beyond Meat’s patent for plant-based meat to the firm’s simulated beef-burger patties.   

They found that more than half of new products introduced during the study period were released by companies that had never issued a patent. This validated their original hunch that “there’s a lot of innovation not captured by patents,” Moreira says.   

The cannibalization effect  

Then the researchers tried to measure innovation more precisely. They estimated how many new products a company released each year relative to its existing number of products.   

They took that figure and adjusted it for factors such as the number of new product features to help them determine how much “novelty” the company introduced to the market. For example, a cereal with only a slightly different flavor from previous cereals would get a lower novelty score than an entirely new type of breakfast food.   

Generally speaking, filing more patents appeared to be associated with companies introducing more new products and features. But when the researchers broke down trends based on firm size, they found a clear difference. The link from patenting to product introduction “is so much weaker for larger-market-share firms,” Moreira says. In other words, even if a big company filed a lot of patents, those filings didn’t necessarily translate to the release of more products or different features.   

To understand why this was the case, the researchers developed a mathematical model of firms’ behavior. It showed that when companies dominate a segment of the market, they have stronger incentives to defend their position than they do to commercialize innovations.    

The reason, the model suggests, is that it’s often not worth the considerable time and money it takes to commercialize an idea—because, even if a new product succeeds, it will likely steal sales from their existing offerings. 

“That cannibalization effect is really strong when you’re a market leader,” Moreira says.   

Patenting, by contrast, doesn’t take much effort because large companies usually already have in-house lawyers for that purpose. Compared with what it would cost a small up-and-coming firm without such resources, “an additional patent for [large companies] is nothing,” she says.   

A barrier to innovation   

To delve deeper into the effects of this behavior, Moreira’s team then analyzed the relationship between patents and revenue. They tried to figure out how much of a firm’s increase in sales could be explained by new products versus by patents alone.   

They found that for large firms, a substantial part of their increase in revenue appeared to be driven by patents rather than by sales of new products.   

In other words, even though these companies weren’t turning patented ideas into products, those patents still appeared to boost revenue—supporting the researchers’ view that patents can serve as a competitive shield. And indeed, the researchers found that when industry leaders filed more patents, smaller firms in the same segment of the market introduced fewer new products. 

The study could help explain a paradox that researchers have noticed in recent years. While patenting has increased, measures such as productivity growth and the number of start-ups formed per year have dropped.   

“If you think about patents as measuring innovation, and you think innovation is generating productivity growth, then it doesn’t square,” Moreira says.   

Because innovation is a key driver of economic growth, the researchers argue that policy changes may be needed to boost commercialization of patented ideas. Patent examiners, for example, could require applicants to provide a working prototype. They could also ask companies to submit evidence that they’ve brought an idea to market (or are working to do so) in order to maintain a patent.  

Without such changes, patents risk becoming barriers rather than catalysts for innovation, “restricting others from commercializing the products that can bring economic growth,” Moreira says.