Patent Policy, Imitation Incentives, and the Rate of Cumulative Innovation

Patent Policy, Imitation Incentives, and the Rate of Cumulative Innovation

Assistant Professor of Economics Priyanka Sharma

Abstract:

We study an infinite-horizon cumulative innovation model, in which patents are characterized by their length and the likelihood of being ruled valid in a patent litigation dispute. Strengthening patent protection via greater validity or length has two opposing effects on innovation incentives: 1) a negative litigation effect due to increasing the litigation threat for future innovators; and 2) a positive competition effect due to reducing profit-eroding imitation by competitive firms without innovation capacity. The optimal innovation-maximizing patent policy balances these two opposing effects. The short-run innovation incentives are a function of the remaining life of the outstanding patent. For moderate patent validity, longer remaining lifetime increases innovation incentives due to the competition effect. The opposite is true for higher validity, for which the litigation effect dominates. The long-run policy that maximizes the rate of innovation calls for moderate validity and infinite patent length when innovators discount future profits significantly, and calls for strong validity and finite length when innovators care more about their future profits.

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