Revisiting the Relationship between Competition, Patenting, and Innovation

Abstract

Introduction Boldrin and Levine (2008a) argue that patent protection is detrimental to product market competition and thereby to innovation. In addition to the analysis in their book, they built a growth model in which innovation and growth can occur under perfect competition (Boldrin and Levine, 2008b). It is a sound idea that reducing product market competition can be detrimental to innovation, and this is not accounted for by the endogenous growth models of Romer (1990) and Aghion and Howitt (1992). In these models, competition is detrimental to innovation and growth for exactly the same reason that renders intellectual property rights (IPRs) in the form of patent rights good for innovation: namely, because competition reduces post-innovation rents whereas patent protection increases these rents. In these comments, we argue that the view of patent protection and product market competition as opposite forces is not robust to considering more elaborated models of product market competition and innovation. In particular, in a step-by-step innovation model, we show that not only can competition enhance innovation, as in Boldrin and Levine (2008b), but also (and perhaps more important), that competition and IPRs can become complementary forces. Why? Because a firm's incentive to innovate depends on the gap between the post-innovation rent and the pre-innovation rent, i.e., the net innovation rent. Typically, product market competition lowers the pre-innovation rent, and it may also lower the post-innovation rent, although the net innovation rent may increase with competition, and all the more so with stronger patent rights protecting the post-innovation rent.

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