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Optimal Rules for Patent Races

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  • Kenneth Judd
  • Karl Schmedders
  • Sevin Yeltekin

Abstract

There are two important rules in a patent race: what an innovator must accomplish to receive the patent and the allocation of the benefits that flow from the innovation. Most patent races end before R&D is completed and the prize to the innovator is often less than the social benefit of the innovation. We study the optimal combination of prize and minimal accomplishment necessary to obtain a patent in a dynamic multistage innovation race. A planner, who cannot distinguish between competing firms, chooses the innovation stage at which the patent is awarded and the magnitude of the prize to the winner. We examine both social surplus and consumer surplus maximizing patent race rules. We show that a key consideration is the efficiency costs of transfers and of monopoly power to the patentholder. We show that races are undesirable only when efficiency costs are low, firms have similar technologies, and the planner maximizes social surplus. However, in all other circumstances, the optimal policy spurs innovative effort through a race of nontrivial duration. Races are also used to filter out inferior innovators.

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File URL: https://student-3k.tepper.cmu.edu/gsiadoc/wp/2006-E37.pdf
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Bibliographic Info

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2006-E37.

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Handle: RePEc:cmu:gsiawp:1327023263

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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  1. Harris, Christopher & Vickers, John, 1985. "Perfect Equilibrium in a Model of a Race," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 193-209, April.
  2. Harris, Christopher J & Vickers, John S, 1985. "Patent Races and the Persistence of Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 461-81, June.
  3. Reinganum, Jennifer F., . "Dynamic Games of Innovation," Working Papers 287, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
  5. Kenneth L. Judd, 2003. "Closed-loop equilibrium in a multi-stage innovation race," Economic Theory, Springer, vol. 21(2), pages 673-695, 03.
  6. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
  7. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
  8. Dasgupta, Partha, 1988. "Patents, Priority and Imitation or, the Economics of Races and Waiting Games," Economic Journal, Royal Economic Society, vol. 98(389), pages 66-80, March.
  9. Denicolo, Vincenzo, 1999. "The optimal life of a patent when the timing of innovation is stochastic," International Journal of Industrial Organization, Elsevier, vol. 17(6), pages 827-846, August.
  10. Hopenhayn, Hugo A & Mitchell, Matthew F, 2001. "Innovation Variety and Patent Breadth," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 152-66, Spring.
  11. Gilbert, R. & Shapiro, C., 1988. "Optimal Patent Length And Breadth," Papers 28, Princeton, Woodrow Wilson School - Discussion Paper.
  12. Harris, Christopher & Vickers, John, 1987. "Racing with Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 1-21, January.
  13. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  14. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  15. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
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Cited by:
  1. Borkovsky, RON N. & Doraszelski, Ulrich & Kryukov, Yaroslav, 2008. "A User's Guide to Solving Dynamic Stochastic Games Using the Homotopy Method," CEPR Discussion Papers 6733, C.E.P.R. Discussion Papers.
  2. Weintraub, Gabriel Y. & Benkard, C. Lanier & Van Roy, Benjamin, 2007. "Markov Perfect Industry Dynamics with Many Firms," Research Papers 1919r, Stanford University, Graduate School of Business.
  3. Derek Clark & Christian Riis, 2007. "Contingent payments in selection contests," Review of Economic Design, Springer, vol. 11(2), pages 125-137, September.
  4. Fershtman, Chaim & Markovich, Sarit, 2006. "Patents, Imitation and Licensing in an Asymmetric Dynamic R&D Race," CEPR Discussion Papers 5481, C.E.P.R. Discussion Papers.
  5. Ron N. Borkovsky & Ulrich Doraszelski & Yaroslav Kryukov, . "A User''s Guide to Solving Dynamic Stochastic Games Using the Homotopy Method," GSIA Working Papers 2009-E23, Carnegie Mellon University, Tepper School of Business.
  6. Malerba, Franco, 2007. "Innovation and the dynamics and evolution of industries: Progress and challenges," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 675-699, August.
  7. Gabriel Weintraub & C. Lanier Benkard & Ben Van Roy, 2005. "Markov Perfect Industry Dynamics with Many Firms," NBER Working Papers 11900, National Bureau of Economic Research, Inc.
  8. Yuan, Michael Y., 2005. "Does decrease in copying cost support copyright term extension?," Information Economics and Policy, Elsevier, vol. 17(4), pages 471-494, October.
  9. Gabriel Y. Weintraub & C. Lanier Benkard & Benjamin Van Roy, 2005. "Markov perfect industry dynamics with many firms," Working Paper Series 2005-23, Federal Reserve Bank of San Francisco.
  10. Weintraub, Gabriel Y. & Benkard, C. Lanier & Van Roy, Benjamin, 2007. "Computational Methods for Oblivious Equilibrium," Research Papers 1969, Stanford University, Graduate School of Business.

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