Working Paper No. 05-11
Patent Protection of Basic Research in
There is an ongoing debate on what is the optimal patent protection of basic technologies in cumulative innovations. I study the optimal patent protection of basic research in a two-stage patent race model with basic research at the first stage and commercial product development at the second stage. I find the following. Investment in basic research initially increases and then decreases in the degree of patent protection of the basic research, while investment in commercial development always decreases in the degree of protection of the basic research. The welfare-maximizing degree of protection of basic research decreases in the monopoly rent from the basic innovation, increases in the marginal cost of the basic innovation, increases in the consumer surplus from the basic innovation and decreases in the consumer surplus from the commercial product. Basic research firms overinvest (underinvest) relative to the social planner at intermediate degrees (low and high degrees) of protection of basic research. Commercial development firms overinvest (underinvest) relative to the social planner when the protection of basic research is weak (strong).
JEL classification: D23, D45, L14
Keywords: cumulative innovation, basic research, patent protection, two-stage patent races