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Market Power Screens Willingness-to-Pay

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  • E. Glen Weyl
  • Jean Tirole

Abstract

What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property (IP) selects high social surplus projects. Optimal innovation policy thus trades off the ex ante screening benefit and the ex post distortion. It solves a multidimensional screening problem in the private information held by the innovator: research cost, quality, and market size of the innovation. The appropriate degree of market power is never full monopoly pricing and is determined by measurable market characteristics, the inequality and elasticity of innovation supply, making the analysis open to empirical calibration. The framework has applications beyond IP policy to the optimal pricing of platforms or the optimal procurement of public infrastructure. Copyright 2012, Oxford University Press.

Suggested Citation

  • E. Glen Weyl & Jean Tirole, 2012. "Market Power Screens Willingness-to-Pay," The Quarterly Journal of Economics, Oxford University Press, vol. 127(4), pages 1971-2003.
  • Handle: RePEc:oup:qjecon:v:127:y:2012:i:4:p:1971-2003
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    File URL: http://hdl.handle.net/10.1093/qje/qjs032
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    Citations

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    Cited by:

    1. Michael Kremer & Christopher Snyder, 2015. "Preventives Versus Treatments," NBER Working Papers 21012, National Bureau of Economic Research, Inc.
    2. Rhodes, Andrew & Wilson, Chris M, 2015. "False Advertising," MPRA Paper 68869, University Library of Munich, Germany.
    3. Briglauer, Wolfgang & Holzleitner, Christian & Vogelsang, Ingo, 2016. "The need for more efficient public funding of new communications infrastructure in EU member states," Information Economics and Policy, Elsevier, vol. 36(C), pages 26-35.
    4. Ben van Hout & Jolian McHardy & Aki Tsuchiya, 2015. "Patent Purchase as a Policy for Pharmaceuticals," Working Papers 2015007, The University of Sheffield, Department of Economics.
    5. Galasso, Alberto & Mitchell, Matthew & Virag, Gabor, 2016. "Market outcomes and dynamic patent buyouts," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 207-243.
    6. repec:eee:respol:v:47:y:2018:i:2:p:343-362 is not listed on IDEAS
    7. Eric Budish & Benjamin N. Roin & Heidi Williams, 2015. "Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials," American Economic Review, American Economic Association, vol. 105(7), pages 2044-2085, July.
    8. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers 13-001, Stanford Institute for Economic Policy Research.
    9. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    10. Alberto Galasso & Hong Luo, 2016. "Tort Reform and Innovation," NBER Working Papers 22712, National Bureau of Economic Research, Inc.

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