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On the Social Desirability of Patents for Sequential Innovations in a Vertically Differentiated Market

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  • Luca Lambertini
  • Piero Tedeschi

Abstract

We consider a market for vertically differentiated goods where firms enter over time, after having developed innovations characterised by different quality levels. We show that patent height and length interact to determine the ultimate emergence of duopoly. In general, imposing quality improvements on later entrants entails the persistence of monopoly, while a duopoly equilibrium emerges when the second innovator is allowed to produce a sufficiently inferior quality and the patent protection granted to the first innovator is not too long-lasting.

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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20060502.pdf
File Function: First version, May 2006
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Bibliographic Info

Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20060502.

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Length: 23 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:mis:wpaper:20060502

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Keywords: innovation; patent height; product quality;

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References

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  1. Lambertini, Luca, 1999. "Endogenous timing and the choice of quality in a vertically differentiated duopoly," Research in Economics, Elsevier, vol. 53(1), pages 101-109, March.
  2. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  3. Suzanne Scotchmer & Jerry Green, 1990. "Novelty and Disclosure in Patent Law," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 131-146, Spring.
  4. Donnenfeld, S. & Weber, S., 1991. "Limit Qualities and Entry Deterrence," Papers 92-4, York (Canada) - Department of Economics.
  5. Ulrich Lehmann-Grube, 1997. "Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 372-384, Summer.
  6. James H. Cardon & Dan Sasaki, 1996. "Pre-emptive Search and R&D Clustering," Discussion Papers 96-21, University of Copenhagen. Department of Economics.
  7. Paul Klemperer, 1990. "How Broad Should the Scope of Patent Protection Be?," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 113-130, Spring.
  8. Gilbert, R. & Shapiro, C., 1988. "Optimal Patent Length And Breadth," Papers 28, Princeton, Woodrow Wilson School - Discussion Paper.
  9. Motta, Massimo, 1992. "Cooperative R&D and vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 10(4), pages 643-661, December.
  10. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  11. Rosenkranz, Stephanie, 1997. "Quality improvements and the incentive to leapfrog," International Journal of Industrial Organization, Elsevier, vol. 15(2), pages 243-261, April.
  12. Suzanne Scotchmer, 1996. "Protecting Early Innovators: Should Second-Generation Products Be Patentable?," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 322-331, Summer.
  13. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-18, December.
  14. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
  15. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  16. van Dijk, Theon, 1996. "Patent Height and Competition in Product Improvements," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 151-67, June.
  17. Beath, John & Katsoulacos, Yannis & Ulph, David, 1987. "Sequential Product Innovation and Industry Evolution," Economic Journal, Royal Economic Society, vol. 97(388a), pages 32-43, Supplemen.
  18. James Bessen & Eric Maskin, 2006. "Sequential Innovation, Patents, and Imitation," Economics Working Papers 0025, Institute for Advanced Study, School of Social Science.
  19. Prajit K. Dutta & Saul Lach & Aldo Rustichini, 1993. "Better Late Than Early: Vertical Differentiation in the Adoption of a New Technology," NBER Working Papers 4473, National Bureau of Economic Research, Inc.
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  22. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
  23. Rosenkranz, Stephanie, 1995. "Innovation and cooperation under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 1-22, March.
  24. Jerry R. Green & Suzanne Scotchmer, 1995. "On the Division of Profit in Sequential Innovation," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 20-33, Spring.
  25. Choi, Chong Ju & Shin, Hyun Song, 1992. "A Comment on a Model of Vertical Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 229-31, June.
  26. 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.
  27. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
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Citations

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Cited by:
  1. Lambertini, Luca & Tampieri, Alessandro, 2012. "Low-quality leadership in a vertically differentiated duopoly with Cournot competition," Economics Letters, Elsevier, vol. 115(3), pages 396-398.
  2. Colombo, Stefano, 2009. "On the effects of selective below-cost pricing in a vertical differentiation model," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(33), pages 1-13.
  3. E. Bacchiega & L. Lambertini & A. Mantovani, 2007. "Process and product innovation in a vertically differentiated industry," Working Papers 583, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Yi-Ling Cheng & Shin-Kun Peng, 2014. "Price competition and quality differentiation with multiproduct firms," Journal of Economics, Springer, vol. 112(3), pages 207-223, July.

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