Sequential Innovation and Patent Policy

Abstract

I examine the impact of patent policy — characterized by patent length and strength — on R&D investment dynamics and the number of competitors in the context of sequential innovation. Overly protective policies introduce two distortions: they delay leaders' and followers' investments toward the end of the patent's life, and they decrease the number of competitors in the market. I study the policy that maximizes innovative activity, and how this policy depends on market characteristics. Patent length and strength complement each other in the sense that one tool is effective at encouraging innovation in markets where the other is not.