|M.Sc Student||Gershoni Naomi|
|Subject||The Implications of Patenting Intermediate-Stage R and D|
|Department||Department of Industrial Engineering and Management||Supervisor||Professor Dan Peled|
|Full Thesis text|
Most innovative industries produce “complex” products, in which more than one innovative step must be achieved before a new generation of products emerges. While each innovative step is of value to the industry, it is not sufficient in and by itself to generate income to its inventor. Such steps are referred to as "critical intermediate R&D results". The vagueness of patent laws leaves it up to the courts to decide when such results qualify for a patent, and what the scope of that patent’s protection is.
We compare two alternative regimes for granting patents to intermediate R&D results, in a two-stage development process. One regime allows the patenting of each intermediate result (“Independent Patents”). The alternative regime grants only one patent for the entire product, as soon as its first R&D stage is complete (“Complete Product Patent”). Although under the first regime more firms are rewarded for their R&D efforts, rewards are smaller, since profits are always shared between two innovators. The second regime offers fewer rewards, yet there is no profit sharing, so rewards are larger. The dynamic nature of the race complicates this description, since firms' R&D decisions affect the magnitude of rewards.
We use a general equilibrium framework with an endogenous innovation-based growth, of the “quality ladder” type. Innovations occur according to a Poisson process, the intensity of which increases at a decreasing rate with R&D efforts (DRS). Within each industry there is a "patent race", where only the first firm to achieve a patentable innovation is rewarded. Firms choose the arrival rate of innovations, in order to maximize their value, for a given size of the innovative step. The equilibrium for each regime is computed by solving the non-linear equilibrium equations numerically, for different values of parameters and exogenous variables. The two regimes are compared in terms of the infinite horizon utility streams they generate, the length of R&D processes, and the attractiveness of the R&D environment (measured by firms' values).
Our results show that “Complete Product Patent” dominates “Independent Patents”, in terms of welfare and R&D rates. Yet, the latter creates a more favorable R&D environment, which attracts more firms to R&D. Imposing an equally favorable environment under both regimes, by relaxing the assumption of an equal number of R&D firms, does not reverse the ranking of these regimes. Nevertheless, the equilibrium utility stream advantage of “Complete Product Patent” is significantly reduced.