Innovation and imitation in a vertically differentiated model—R&D costs as a prerequisite to patentability
Chien-Chieh Huang,
Wei-Wei Lee,
I-Huei Lee
Issue:
Volume 1, Issue 1, December 2012
Pages:
1-11
Published:
30 December 2012
DOI:
10.11648/j.eco.20120101.11
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Abstract: By incorporating an increasing R&D cost function into a vertically differentiated model, we investigate the optimal behaviors of an innovator and an imitator as well as the effectiveness of patent protections with varied R&D costs. The results show that the imitator enjoys the second-mover advantage and the high-quality advantage in a free market. The effect on social welfare from implementing patent protection depends on the magnitude of the R&D costs. In the case of low R&D costs, patent protection should not be granted, since competition could enhance social welfare. In the case of a high R&D cost, patent protection will be unable to induce innovation, making it invalid for raising social welfare. Only in the case of moderate R&D costs could patent protection provide adequate incentive to the innovator, and thus improve social welfare. As a policy solicitation, we suggest that R&D costs could be a good measure of non-obviousness and should be included as a prerequisite to patentability.
Abstract: By incorporating an increasing R&D cost function into a vertically differentiated model, we investigate the optimal behaviors of an innovator and an imitator as well as the effectiveness of patent protections with varied R&D costs. The results show that the imitator enjoys the second-mover advantage and the high-quality advantage in a free market. ...
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