Heterogeneity of Innovations as an Argument for Limited Patent Duration: Case of Multi-Product Monopolies

Abstract

This paper studies the question why patents for multi-product monopolies should be finite. The monopolist is developing new versions of the basic product continuously and simultaneously invests into the improvement of all the existing and newly created products, thus optimally managing both horizontal and vertical innovations. It turns out that finite duration of the patent for each new product stimulates the speed of introduction of new products over the development of existing ones, thus fostering structural change in a given industry, while decreasing overall intensity of innovations in comparison to infinitely long patents. The crucial role in this is played by the relative complexity of newly introduced products and corresponding patent holding costs.