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Patents, Research Exemption, and the Incentive for Sequential Innovation

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  • Moschini, GianCarlo
  • Yerokhin, Oleg

Abstract

We develop a dynamic duopoly model of R&D competition to improve the quality of a final good. The innovation process is sequential and cumulative, and takes place alongside production in an infinite-horizon setting. In this context we study the R&D incentive impacts resulting from a モresearch exemptionヤ or モexperimental useヤ provision. We specify and solve the innovation and production model under two distinct intellectual property right (IPR) regimes, essentially a patent system with and without a research exemption. The model applies closely to the question of the optimal mode of IPR protection for plants, where traditional plant breederメs rights allow for a well-defined research exemption, whereas standard utility patents do not. We characterize the properties of the relevant Markov perfect equilibria and investigate the profit and welfare effects of the research exemption. We find that firms, ex ante, always prefer full patent protection. The welfare ranking of the two IPR regimes, on the other hand, depends on the relative magnitudes of the costs of initial innovation and improvements. In particular, a research exemption is most likely to provide inadequate R&D incentives when there is a large cost to establish the initial research program.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12598.

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Date of creation: 01 Jan 2008
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Publication status: Published in Journal of Economics & Management Strategy 2008, vol. 17, pp. 379-412
Handle: RePEc:isu:genres:12598

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
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Web page: http://www.econ.iastate.edu
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  1. Denicolo, Vincenzo & Zanchettin, Piercarlo, 2002. "How should forward patent protection be provided?," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 801-827, June.
  2. James Bessen & Eric Maskin, 2006. "Sequential Innovation, Patents, and Imitation," Economics Working Papers 0025, Institute for Advanced Study, School of Social Science.
  3. Suzanne Scotchmer, 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 29-41, Winter.
  4. Robert M Hunt, 2003. "Patentability, Industry Structure and Innovation," Levine's Working Paper Archive 618897000000000689, David K. Levine.
  5. Bessen, James, 2004. "Holdup and licensing of cumulative innovations with private information," Economics Letters, Elsevier, vol. 82(3), pages 321-326, March.
  6. Ted O'Donoghue & Suzanne Scotchmer & Jacques-François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 1-32, 03.
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Cited by:
  1. Moschini, GianCarlo, 2010. "Competition Issues in the Seed Industry and the Role of Intellectual Property," Staff General Research Papers 31611, Iowa State University, Department of Economics.
  2. Marc Baudry & Adrien Hervouet, 2014. "Promoting innovation on the seed market and biodiversity: the role of IPRs and commercialisation rules," EconomiX Working Papers 2014-32, University of Paris West - Nanterre la Défense, EconomiX.
  3. Marc Baudry & Adrien Hervouet, 2014. "Innovation on the seed market: the role of IPRs and commercialisation rules," Working Papers 1411, Chaire Economie du Climat.
  4. Robert M. Hunt, 2007. "Economics and the design of patent systems," Working Papers 07-6, Federal Reserve Bank of Philadelphia.

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