Patents and Supra-competitive Prices: Evidence from Consumer Products

Abstract

A patent system is a central tool in innovation policy. The prospect of monopolistic pricing conferred by patent protection supposedly encourages firms to innovate. However, there is scant empirical evidence supporting the existence of higher markups for patent-protected products. Using an original dataset that links a broad range of consumer products to the patents that protect them, we study the impact of patent protection on product prices. The empirical strategy exploits exogenous variations in patent status, namely the lapse of the patent after the statutory 20-year term limit is reached. We find that a loss of patent protection leads to an 8-10 percent drop in product prices. The price drop, which starts about one year before patent expiry, is larger for more important patents and is more pronounced in more competitive product markets.

Keywords: innovation, markup, patent system, product, R&D incentive

JEL Classification: O31, O34, K29