Sequential Innovation, Patents, And Imitation
James E. Bessen
Boston University - School of Law; Research on Innovation
Princeton University - Department of Economics; Harvard University - Department of Economics; Massachusetts Institute of Technology (MIT) - Department of Economics
MIT Dept. of Economics Working Paper No. 00-01
How could such industries as software, semiconductors, and computers have been so innovative despite historically weak patent protection? We argue that if innovation is both sequential and complementary--as it certainly has been in those industries--competition can increase firms' future profits thus offsetting short-term dissipation of rents. A simple model also shows that in such a dynamic industry, patent protection may reduce overall innovation and social welfare. The natural experiment that occurred when patent protection was extended to software in the 1980?s provides a test of this model. Standard arguments would predict that R&D intensity and productivity should have increased among patenting firms. Consistent with our model, however, these increases did not occur. Other evidence supporting our model includes a distinctive pattern of cross-licensing in these industries and a positive relationship between rates of innovation and firm entry.
Number of Pages in PDF File: 34
JEL Classification: O31, O34
Date posted: February 9, 2000
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