The winner will be the rm that spends the most on its

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Unformatted text preview: only the …rst …rm to innovate will succeed in winning the patent & capture the rents. The winner will be the …rm that spends the most on its R&D program. The other …rms will get nothing. Lecture 13: Patent race, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Intro Rivalry Value of innovation if R&D rivalry Active R&D rivalry (patent race): For any d that is committed by a rival, as long as positive pro…ts can be obtained, a …rm spends a little more to win the patent. Given that each …rm is doing the same, the winning …rm will expect the present value of its pro…ts to be zero. Thus, the optimal R&D expenditure, de , is such that the present value of the invention net the cost is zero (net pro…ts are zero: PV fVe g de = 0) PV fVe g = de Lecture 13: Patent race, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Intro Rivalry The optimal de is where PV fVe g = de . Competition in the market for R&D can lead (not always) to socially excessive R&D expenditures, de > ds . Lecture 13: Patent race, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Intro Rivalry Number of …rms in a race Lecture 13: Patent race, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Intro Lecture 13: Patent race, Rivalry Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Intro Lecture 13: Patent race, Rivalry Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Intro Rivalry Exercise Lecture 13: Patent race, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Intro Rivalry The value of the patent for developing an operating system is estimated to be around V = $150. Suppose that three …rms, labeled i = 1, 2, 3, engage in an innovation race for this operating system. If only one …rm disco...
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This note was uploaded on 03/16/2014 for the course ECON 483 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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