Patent Races with a Sequence of Innovations

Abstract

The theoretical literature on patent races has been an interesting and fast-evolving one, moving from largely heuristic discussion to quite rigorous analysis within the space of the past two decades. This literature has been characterized by a pattern of interesting results which are subsequently reversed under alternative behavioral and/or structural assumptions. This sensitivity of key results to mutually exclusive but perhaps equally plausible modeling assumptions has kept conclusions and policy recommendations in a constant state of revision. All of these papers have been concerned with a single innovation produced by a number of identical agents. This paper generalizes this literature in two important ways. First, we consider a market in which one firm is the current patent-holder the incumbent, while the remaining firms are non-incumbents; firms are entirely symmetric in every other sense. Second, we consider a sequence of innovations, so that success does not imply that the successful firm reaps monopoly profits forever after, but only until the next, better innovation is developed.