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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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number
2006-E37.
Length: Date of creation: Date of revision: Handle: RePEc:cmu:gsiawp:1327023263
Contact details of provider: 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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Paper
Kenneth Judd & Karl Schmedders, 2002.
"Optimal Rules for Patent Races,"
Discussion Papers
1343, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Reinganum, Jennifer F., .
"Dynamic Games of Innovation,"
Working Papers
287, California Institute of Technology, Division of the Humanities and Social Sciences.
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