Working Paper No. 04-09

Strategic R&D Delays Generate Market Power
Maggie Xiaoyang Chen and Murat Iyigun
September 2004

ABSTRACT

We develop a theoretical model in which both the R&D resources to develop new product applications and the market structure of consumption goods manufacturing are determined endogenously. There exists uncertainty with respect to the development date of an inaugural product, although higher R&D spending shortens the expected product development stage. Once an inaugural product application is introduced, the costs of imitation decline. According to the model, the time between a patent application and the development of an inaugural product is influenced by two factors: returns to scale in R&D and "strategic delays." Stategic delays in new product development are most likely to occur when earlier dates of new product development enable a larger number of imitators to penetrate an industry. In particular, we show that product developers tend to introduce new products later in the patent protection period when imitation costs are relatively low. We then explore the link between optimal patent lengths and market structure. Our findings suggest that, in order to minimize the strategic delay of inaugural applications, legal patent lengths should be shorter in industries where barriers to entry are relatively low.

JEL classification: I20; J24; O11; O31; O40
Keywords: technological change, industrial organization, intellectual property, growth

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