Some Simple Economics of Patent Protection for Complex Technologies

Abstract

We analyze patent protection when innovative technologies are "complex" in that they involve sequential and complementary innovations. We argue that complexity affects the classic Nordhaus trade-off between innovation and static monopoly distortions. We parametrize the degree of sequentiality and that of complementarity and show that the optimal level of patent protection increases with both. We also address the issue of the optimal division of profit among different innovators.

Keywords: Complementarity, Division of profit, Elasticity of the supply of inventions, Patent design, Sequential innovation

JEL Classification: O30, O40