Does intellectual monopoly stimulate or stifle innovation? (original) (raw)
2012, European Economic Review
This study develops an R&D-based growth model that features both vertical and horizontal innovation to shed some light on the current debate on whether patent protection stimulates or sti ‡es innovation. Speci…cally, we analyze the growth and welfare e¤ects of patent protection in the form of pro…t division between sequential innovators along the quality ladder. We show that patent protection has asymmetric e¤ects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Maximizing the incentives for vertical (horizontal) innovation requires a pro…t-division rule that assigns the entire ‡ow pro…t to the entrant (incumbent) of a quality ladder. In light of this …nding, we argue that in order to properly analyze the growth and welfare implications of patent protection, it is important to disentangle its di¤erent e¤ects on vertical and horizontal innovation.
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