Sequential innovation, patent policy, and the dynamics of the replacement effect. (25th June 2019)

• Record Type: Journal Article
• Authors: Parra, Álvaro
• Is Part Of: Rand journal of economics. Volume 50:Number 3(2019)
• Page Start: 568
• Page End: 590
• Publication Date: 2019-06-25
• Subjects: Industrial organization (Economic theory) -- Periodicals; Microeconomics -- Periodicals; Services publics -- Périodiques; Économie industrielle -- Périodiques; Microéconomie -- Périodiques; 338.6
• DOI: 10.1111/1756-2171.12287
• Languages: English
• ISSNs: 0741-6261

Abstract

Abstract: I study how patent policy—characterized by patent length and forward protection—affects Research and Development (R&D) dynamics, leadership persistence, and market structure. Firms' R&D investments increase as the patent's expiration date approaches. Through forward protection, followers internalize the leader's replacement effect. In protective systems, this internalization is substantial, reversing Arrow's traditional result: followers invest less than leaders at every moment of the patent's life. I study the policy that maximizes innovative activity. Overly protective policies decrease innovation pace through two mechanisms: delaying firms' investments toward the end of the patent's life and decreasing the number of firms performing R&D.