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Market Power Screens Willingness-to-Pay

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  • E. Glen Weyl
  • Jean Tirole

Abstract

What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property (IP) selects high social surplus projects. Optimal innovation policy thus trades off the ex ante screening benefit and the ex post distortion. It solves a multidimensional screening problem in the private information held by the innovator: research cost, quality, and market size of the innovation. The appropriate degree of market power is never full monopoly pricing and is determined by measurable market characteristics, the inequality and elasticity of innovation supply, making the analysis open to empirical calibration. The framework has applications beyond IP policy to the optimal pricing of platforms or the optimal procurement of public infrastructure. Copyright 2012, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/qje/qjs032
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Bibliographic Info

Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 127 (2012)
Issue (Month): 4 ()
Pages: 1971-2003

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Handle: RePEc:oup:qjecon:v:127:y:2012:i:4:p:1971-2003

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Cited by:
  1. Galasso, Alberto & Mitchell, Matthew & Virag, Gabor, 2014. "Market Outcomes and Dynamic Patent Buyouts," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9847, C.E.P.R. Discussion Papers.
  2. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers, Stanford Institute for Economic Policy Research 13-001, Stanford Institute for Economic Policy Research.
  3. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 121(3), pages 528 - 583.

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