Innovation and imitation in a vertically differentiated model—R&D costs as a prerequisite to patentability
Volume 1, Issue 1, December 2012, Pages: 1-11
Received: Dec. 7, 2012; Published: Dec. 30, 2012
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Chien-Chieh Huang, Dept. of Economics, Soochow University, Taipei, Taiwan
Wei-Wei Lee, Dept. of Economics, National Dong Hwa Uiversity, Hualien, Taiwan
I-Huei Lee, Financial Planning Specialist, Bank of Banhsin, Taipei, Taiwan
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By incorporating an increasing R&D cost function into a vertically differentiated model, we investigate the optimal behaviors of an innovator and an imitator as well as the effectiveness of patent protections with varied R&D costs. The results show that the imitator enjoys the second-mover advantage and the high-quality advantage in a free market. The effect on social welfare from implementing patent protection depends on the magnitude of the R&D costs. In the case of low R&D costs, patent protection should not be granted, since competition could enhance social welfare. In the case of a high R&D cost, patent protection will be unable to induce innovation, making it invalid for raising social welfare. Only in the case of moderate R&D costs could patent protection provide adequate incentive to the innovator, and thus improve social welfare. As a policy solicitation, we suggest that R&D costs could be a good measure of non-obviousness and should be included as a prerequisite to patentability.
Vertical Differentiation, Second-Mover Advantage, High-Quality Advantage, R&D Costs, Prerequisite To Patentability
To cite this article
Chien-Chieh Huang, Wei-Wei Lee, I-Huei Lee, Innovation and imitation in a vertically differentiated model—R&D costs as a prerequisite to patentability, Economics. Vol. 1, No. 1, 2012, pp. 1-11. doi: 10.11648/
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