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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.

Suggested Citation

  • Moschini, GianCarlo & Yerokhin, Oleg, 2008. "Patents, Research Exemption, and the Incentive for Sequential Innovation," Staff General Research Papers Archive 12598, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:12598
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    File URL: http://www2.econ.iastate.edu/papers/p5364-2008-01-01.pdf
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    References listed on IDEAS

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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. Robert M. Hunt, 2004. "Patentability, Industry Structure, and Innovation," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 401-425, September.
    3. James Bessen & Eric Maskin, 2009. "Sequential innovation, patents, and imitation," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 611-635.
    4. 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, March.
    5. Bessen, James, 2004. "Holdup and licensing of cumulative innovations with private information," Economics Letters, Elsevier, vol. 82(3), pages 321-326, March.
    6. 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.
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    Cited by:

    1. Hervouet, Adrien & Langinier, Corinne, 2015. "Plant Breeders’ Rights, Patents and Incentives to Innovate," Working Papers 2015-7, University of Alberta, Department of Economics.
    2. Robert M. Hunt, 2010. "Business Method Patents And U.S. Financial Services," Contemporary Economic Policy, Western Economic Association International, vol. 28(3), pages 322-352, July.
    3. Lence, Sergio H. & Hayes, Dermot J. & Alston, Julian & Smith, J. Stephen C., 2015. "Intellectual Property in Plant Breeding: Comparing Different Levels and Forms of Protection," Staff General Research Papers Archive 38978, Iowa State University, Department of Economics.
    4. Baudry Marc & Hervouet Adrien, 2016. "Innovation in the Seed Market: The Role of IPRs and Commercialization Rules," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 14(1), pages 51-68, May.
    5. Moschini, GianCarlo, 2010. "Competition Issues in the Seed Industry and the Role of Intellectual Property," Choices, Agricultural and Applied Economics Association, vol. 25(2).
    6. Brüggemann, Julia & Crosetto, Paolo & Meub, Lukas & Bizer, Kilian, 2016. "Intellectual property rights hinder sequential innovation. Experimental evidence," Research Policy, Elsevier, vol. 45(10), pages 2054-2068.
    7. 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 Nanterre, EconomiX.
    8. Robert M. Hunt, 2007. "Economics and the design of patent systems," Working Papers 07-6, Federal Reserve Bank of Philadelphia.

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