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Does intellectual monopoly stimulate or stifle innovation?

By Angus C. Chu, Guido Cozzi and Silvia Galli

Abstract

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 stifles innovation. Specifically, we analyze the growth and welfare effects of patent protection in the form of profit division between sequential innovators along the quality ladder. We show that patent protection has asymmetric effects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Maximizing the incentives for vertical (horizontal) innovation requires a profit-division rule that assigns the entire flow profit to the entrant (incumbent) of a quality ladder. In light of this finding, we argue that in order to properly analyze the growth and welfare implications of patent protection, it is important to disentangle its different effects on vertical and horizontal innovation.

Topics: O34 - Intellectual Property Rights, O31 - Innovation and Invention: Processes and Incentives, O40 - General
Year: 2010
DOI identifier: 10.1016/j.euroecorev.2012.01.007
OAI identifier: oai:mpra.ub.uni-muenchen.de:29061

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