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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.

Suggested Citation

  • Tirole, Jean & Weyl, Glen, 2010. "Materialistic Genius and Market Power: Uncovering the best innovations," IDEI Working Papers 629, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:23108
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    Cited by:

    1. Brennan, Timothy J. & Macauley, Molly & Whitefoot, Kate, 2011. "Prizes, Patents, and Technology Procurement: A Proposed Analytical Framework," Discussion Papers dp-11-21-rev, Resources For the Future.
    2. Alexander White & E. Glen Weyl, 2010. "Imperfect Platform Competition: A General Framework," Working Papers 10-17, NET Institute, revised Nov 2010.
    3. Bar-Isaac, Heski & Caruana, Guillermo & Cuñat, Vicente, 2011. "Locating inside the Salop circle: demand rotations in a micro-founded model," LSE Research Online Documents on Economics 43163, London School of Economics and Political Science, LSE Library.
    4. Hugo Hopenhayn & Matthew Mitchell, 2012. "Rewarding Duopoly Innovators: The Price of Exclusivity," NBER Chapters,in: Standards, Patents and Innovations National Bureau of Economic Research, Inc.

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