When innovation is sequential, the development of new products depends on the access to previous discoveries. As a consequence the patent system affects both the revenues and the cost of the innovator. We construct a model of sequential innovation in which an innovator uses n patented inputs in R&D to invent a new product. We ask three questions: (i) what is the net effect of patents on innovation as technologies become more complex (n increases)? (ii) are patent pools welfare enhancing? (iii) what is the optimal response of patent policy as technological complexity increases? We find that the answers to these questions depend on the degree of complementarity and substitutability between the inputs used in research.
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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number
we076838.