Economics of Patenting an Input Essential to Further Research

Abstract

Recent developments in intellectual property rights in the areas of biotechnology and computer science have resulted in patenting of elements of innovation sequences, within which one invention makes further innovation possible. In this context, the sophistication of patent life as a policy instrument, especially when innovators who use the invention are competitive, has been insufficiently appreciated. This study takes a closer look at the dynamic implications of the patent instrument when an innovation granted for patent is an essential input to further innovation in a research sequence. In a highly stylized model, we show that a limit on patent life can induce subsequent innovation that would be precluded under infinite patent life, and reduce rent dissipation in such innovation. On the other hand, an increase in a finite patent life T can advance the date of innovation when its cost is in an intermediate range.