A dynamic model of patent portfolio races
We propose a dynamic model of a patent portfolio race in an industry in which innovation is incremental. Two firms compete in prices and in research. We study the Markov perfect (closed-loop) equilibrium of the resulting differential game, identifying a steady state in which firms compete neck and neck. In this equilibrium, innovation rates are inefficiently high from the firms’ viewpoint. The firms are caught in a prisoners’ dilemma and so have an incentive not to enforce their patents aggressively in order to coordinate on a more “cooperative” equilibrium.
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