The Economic Benefits of Modular Innovation

Abstract

We begin our study with a descriptive analysis of the growing role of modular (rather than architectural) innovation across several industries that uncovers regularities of US patent dynamics. Motivated by this new innovation reality as suggested by these descriptive patterns, we develop a new model for studying the impact of modular innovation investments in technology on subsequent product market competition. We derive conditions for which technologies are shared with competitors via licensing, but only partially, given the modular nature of innovation. Finally, our analysis suggests that modularization might introduce new avenues for economic benefits via increased innovation activity and welfare.

Keywords: Cooperative Innovation; Innovation Foreclosure and Preemption; Research and Development; Standardization; Strategic Incentives; Technology Licensing