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Materialistic Genius and Market Power: Uncovering the best innovations

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  • Tirole, Jean
  • Weyl, Glen

Abstract

What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property screens out projects generating low consumer surplus per unit sold. We build a model that formalizes this trade-off and develop tools for solving the resulting multidimensional screening problem. Optimal policy generally calls for some market power but never full monopoly pricing. The appropriate degree of market power is determined by a value-weighted average of the innovation supply elasticity multiplied by the log-variance of innovation quality. This quantifies the value of the materialistic genius long associated with entrepreneurship, opening it to empirical calibration. Our results also apply to the pricing of platforms and public infrastructure.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 629.

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Length: 58 pages
Date of creation: 15 Aug 2010
Date of revision:
Handle: RePEc:ide:wpaper:23108

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  1. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
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Cited by:
  1. Bar-Isaac, Heski & Caruana, Guillermo & Cuñat, Vicente, 2013. "Locating inside the Salop circle: Demand rotations in a micro-founded model," MPRA Paper 46468, University Library of Munich, Germany.
  2. Alexander White & E. Glen Weyl, 2010. "Imperfect Platform Competition: A General Framework," Working Papers, NET Institute 10-17, NET Institute, revised Nov 2010.

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