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Innovate AND Imitate ? : Dynamic Innovation, Patents, and Costly Imitation

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  • Jorge Andrés Ferrando Yanez

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Abstract
We build a continuous time dynamic model of sequential innovation with stochastic imitationin which firms can simultaneously undertake original and imitative R&D, to compare theperformance of (i) a system with patent protection (with or without licenses) and (ii) a systemwith costless full spillovers of innovation. We confirm previous findings that if innovation iscomplementary (i.e. chances of innovating increase with the number of firms, for a givenR&D expenditure) and sequential (i.e. innovations arrive one at a time), firms' profits mightincrease in the second scenario. However, we show that from a social perspective the tradeoffbetween socially costly (but more efficient) imitative R&D and welfare improvingreduction of innovators' ex post monopoly rents does not always balance in favour of weakpatents, and determine the conditions under which firms' preferences with regards to theintellectual property protection system coincide with social objectives. We also show that thepresence of patents in a context with endogenously determined stochastic imitation reducesthe socially optimal pace of original innovation, and interpret the observed cross-licensingagreements and weaker patent protection observed in relatively more dynamic industries asthe natural outcome of a dynamic R&D game.

Suggested Citation

  • Jorge Andrés Ferrando Yanez, 2003. "Innovate AND Imitate ? : Dynamic Innovation, Patents, and Costly Imitation," Working Papers 2003-31, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2003-31
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    References listed on IDEAS

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