Dynamic Oligopoly and Optimal Patent Design
[JOB MARKET PAPER ]
Richard M. Katzwer
Dept. of Economics
Princeton University
rkatzwer@princeton.edu
November 20, 2015
Abstract
This paper develops a dynamic oligopoly model of innovation with intellectual property protection.The computational model allows for a rich set of patent policy instruments including statutory duration, patent breadth, patent maintenance fees and cost subsidies. The rm side includes dynamic entry/exit, R&D investment decisions as well as a novel litigation subgame to resolve intellectual property disputes and patent assignment. This paper provides a conceptual
framework for linking several patent literatures, including “patent races”, “patents-asoptions”,“patent trolling”, and how to reward cumulative innovators. To my knowledge, this is the rst paper that examines realistic patent policy in a fully dynamic model with entry and exit. Additionally, to my knowledge this is the first paper that structurally examines the e ffect of patent litigation on dynamic innovation. Broadly, the paper demonstrates how optimal policy
should vary in industry characteristics, providing several policy recommendations. More specifically, the paper highlights two theoretical observations: (1) a dynamic model is necessary
to properly evaluate whether additional patent protection is pro- or anti-competitive,and (2) To compute optimal patent policy, it is necessary to consider the full range of policy instruments jointly. Computation demonstrates that di erent instruments have non-trivial
interactions since they enter the rms’ problems di erently. They do not simply trade o ff “one-for-one”, and we cannot simply discuss a single-index “patent strength” measure. The sign on the slope of comparative statics of optimal policy as a function of primitives can change depending on the set of policies that are allowed to vary, as well as when we consider dynamic vs. static model.
