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Strategic R&D Delays Generate Market Power

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  • Murat F. Iyigun
  • X. Maggie Chen

Abstract

We develop an economic growth model in which both the R&D resources to develop new product applications and the market structure of consumption goods manufacturing are determined endogenously. There exists uncertainty with respect to the development date of an inaugural product, although higher R&D spending shortens the expected product development stage. Once an inaugural product application is introduced, the costs of imitation decline. According to the model, the time between a patent application and the development date of an inaugural product is influenced by two factors: returns to scale in R&D and "strategic delay" in order to maintain market power. We find in particular that effective patent lengths--the interval of time between the introduction of inaugural products and the expiration of patents--decline faster when imitation costs are relatively low. We then explore the link between optimal patent lengths and market structure. Our findings suggest that, in order to minimize the strategic delay of inaugural applications, patent lengths should be longer in industries where barriers to entry are relatively high

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 213.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:213

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Keywords: technological change; industrial organization; intellectual property; economic growth;

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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 8904, University of Western Ontario, Department of Economics.
  2. Imbs, Jean & Wacziarg, Romain, 2000. "Stages of Diversification," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2642, C.E.P.R. Discussion Papers.
  3. Emmanuel Dechenaux & Brent Goldfarb & Scott A. Shane & Marie C. Thursby, 2003. "Appropriability and the timing of innovation: Evidence from MIT inventions," NBER Working Papers 9735, National Bureau of Economic Research, Inc.
  4. Josh Lerner, 2000. "150 Years of Patent Protection," NBER Working Papers 7478, National Bureau of Economic Research, Inc.
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  6. Goel, Rajeev K, 1996. "Uncertainty, Patent Length and Firm R&D," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 35(66), pages 74-80, June.
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  8. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  9. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
  10. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
  11. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders and Product Cycles," NBER Working Papers 3201, National Bureau of Economic Research, Inc.
  12. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 514-26, June.
  13. Glenn Ellison & Sara Fisher Ellison, 2011. "Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 3(1), pages 1-36, February.
  14. Peretto, Pietro F., 1995. "Cost Reduction, Entry, and the Dynamics of Market Structureand Economic Growth," Working Papers, Duke University, Department of Economics 95-48, Duke University, Department of Economics.
  15. Horowitz, Andrew W & Lai, Edwin L-C, 1996. "Patent Length and the Rate of Innovation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 785-801, November.
  16. Kamien, Morton I & Schwartz, Nancy L, 1974. "Patent Life and R & D Rivalry," American Economic Review, American Economic Association, American Economic Association, vol. 64(1), pages 183-87, March.
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