Uncertain Innovation and the Persistence of Monopoly

In a recent paper published in this Review, Gilbert and Newbery (1982) show that, because an incumbent firm enjoys greater marginal incentives to engage in R and D (under their assumption of deterministic invention), the incumbent firm will engage in preemptive patenting. Thus the industry will tend to remain monopolized, and by the same firm. They then argue heuristically that this result extends to the case in which innovation is uncertain. One form of this conjecture is that the incumbent patents the innovation more often than not. We briefly review the Gilbert and Newbery argument as well as those in related papers (Gilbert, 1981 and Craswell, 1981). We then present a model which incorporates uncertainty and concludes the contrary; that is, in a Nash equilibrium the incumbent firm invests less on the innovation than a challenger. Consequently, the incumbent firm will patent the innovation less often than not. This result indicates that one need worry far less about persistent monopoly than would be suggested by the Gilbert and Newbery analysis.