Econ 483_Lecture 18_Quality ladders_Competition policy

The eective patent life is likely to be much shorter

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Unformatted text preview: Quality ladders The faster the improvements come, the shorter is the market incumbency of each innovator. The e¤ective patent life is likely to be much shorter than the statutory life. But, at least, the incumbency must be long enough to recover costs. O’ Donoghue, Scotchmer & Thisse ’ Why are the bene…ts of 98: innovations hard to appropriate in this environment of rapid turnover ? Lecture 18: R&D joint ventures, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Q uality ladders Competition policy R&D joint ventures Quality ladders Suppose: The increment & subsequent improvements are patentable. p = ∆: the price for the highest-quality product; the incumbent’ price s depends on its quality advantage over the previous product. Only the highest-quality product is sold. Consumers buy only the highest-quality product. r : the discount rate - What is the social value of an improvement of size ∆? - How much does the improver appropriate? Lecture 18: R&D joint ventures, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Q uality ladders Competition policy R&D joint ventures Quality ladders Social value: ∆ r: the value of an incremental innovation ∆ which lasts forever, since each subsequent innovation builds on the existing innovation. Value for the improver: Suppose: the improver is the market incumbent only for one period selling at p = ∆ & earns ∆. For many ideas, the earnings may not cover the cost, c > ∆, even if investing in would be e¢ cient from the social perspective, ∆ > c . r ) The improver’ earnings are much smaller than the social value. s Lecture 18: R&D joint ventures, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Q uality ladders Competition policy R&D joint ventures The "leading breadth" gives each innovator rights on future innovations (O’ Donoghue, Scotchmer, Thisse...
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