Two-Stage Patent Races and Patent Policy

I analyze the optimal degree of forward patent protection in a two-stage patent race framework. I compare three patent regimes, as the second innovation may be unpatentable and infringing (UI), patentable and infringing (PI), or patentable and not infringing (PN). Forward protection is highest in regime UI and lowest in regime PN. I identify a fundamental inefficiency affecting regime UI, namely that it always leads to underinvestment in the second innovation, and I note various determinants of the welfare ranking of the regimes. Specifically, strong forward protection becomes less attractive as the relative profitability of the first innovation increases and the relative difficulty of obtaining it decreases.

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