Patents. Patents. Chapter 9. March 30, 2015

Transcription

1 Chapter 9. March 30, 2015

2 Legal document granted by a government to an inventor it has to be novel, nontrivial and useful it gives the inventor the sole right to exploit the particular invention U.S (17 years of patent protection) Europe (20 years of patent protection) it is useful for encouraging new product development and process innovation Two social goals To provide rms with incentives for producing know-how to make the new information available to the public as fast as possible

3 USPTO: The right conferred by the patent grant is: the right to exclude others from making, using, o ering for sale, or selling the invention in the United States or importing the invention into the United States. There are three types of patents: 1) Utility patents may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof; 2) Design patents may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture; and 3) Plant patents may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

4 A simple method for calculating the optimal duration of a patent Nordhaus (1969) and Scherer (1972) Assume p = a Q and a > c An investment of x in R&D reduces cost c > c Assume that the innovation is minor, hence p = c and patent life T 0 x

5 A simple method for calculating the optimal duration of a patent Innovator enjoys a pro t M for T periods (see gure) and zero pro ts from period T + 1 The area DL denotes the society s deadweight loss (monopoly power) During T periods the society s bene ts from innovation are M After period T price is p = c x. Hence the gains are M + DL M(x) = (a c)x and DL(x) = x 2 2 Dynamic model: let ρ = 1 1+r denotes the discount factor (how much a dollar next year is worth today)

6 A simple method for calculating the optimal duration of a patent Two-stage game: 1 the government sets the duration of the patent life T 2 the innovator chooses his/her R&D level (given T ) During T periods the innovator is protected by the patent Let s analyze the second stage of the game maxπ (x; T ) = T ρ t 1 M(x) TC (x) x t=1 maxπ (x; T ) = 1 ρt x 1 ρ (a c)x x 2 2 x I = 1 ρt 1 ρ (a c) The R&D increases in T, ρ (or increases in r) and a, and decreases in c

7 A simple method for calculating the optimal duration of a patent First stage of the game max W (T ) h ρ t 1 CS o + M(x I ) T t=1 (x I ) 2 2 s.t. x I = 1 ρt 1 ρ (a c) maxw (T ) = CS o + (a c)x x 1 ρ s.t. x I = 1 ρt 1 ρ (a c) The optimal life is nite. Formally T < i + ρ t 1 DL(x I ) t=t +1 (x I ) 2 1 ρ ρ T 2 1 ρ

8 Governments and International R&D Races We observe that governments never completely leave R&D to be performed by free markets Consider Krugman s (1986) illustration of how governments can enhance the international strategic position of the rms located in their countries. Suppose two rms Boeign (located in US) and Airbus (located in EU)

9 Governments and International R&D Races Each rm is considering developing the future super-large passenger plane the "megacarrier" each rm has a binary choice: develop (and produce) or don t develop ( and don t produce)

10 Governments and International R&D Races Assume EC subsidizes Airbus by $15 A government can secure the world dominance of the domestic rm in a product having a large development cost relative to the potential market size.

11 Subsidizing process innovation Brander and Spencer (1983,1985) Consider two countries i = 1, 2 One rm in each country producing an homogeneous good to be sold in the world market The world s demand is p = a Q and preinnovation cost c Assume that when the government undertakes R&D at a level x i, then the rm s unit production cost is c x i The total cost to country i of engaging in R&D is TC (x i ) = (x i ) 2 2 The two rms play a Cournot quantity game π c i = [a 2 (c x i ) + c x j ] 2 9 = [a c + 2x i x j ] 2 9

12 Subsidizing process innovation Each government takes x j as given and chooses and R&D level to maximize the welfare of its country maxw i π c x i TC (x i ) = [a c + 2x i x j ] 2 i 9 x i R i (x j ) = 4(a c) 4x j (x i ) 2 2 Strategic substitutes or complements? x i = 4(a c) 4(4(a c) 4x i ) 12(a c) 4(a c) x i = = 15 5

13 Subsidizing process innovation Proposition 9.8: If initially the world is characterized by no government intervention, it is always bene cial for at least one country to subsidize R&D. That is, the increase in pro t from export sales associated with the cost-reducing R&D dominates the cost of R&D. Why does the private sector not invest in R&D, given that the rms increase in pro t can more than cover R&D cost? Why cannot banks nance this innovation?