Patent Height and Competition in Product Improvements

Abstract

MERIT Research Memoranda can be ordered from the address below, or be obtained in electronic form (Postscript) by anonymous ftp at meritbbs.rulimburg.nl Revised Version, April 1994 The stringency of novelty requirements that patent offices and courts use in judging infringement issues and patentability of inventions defines the height of protection provided to a patentholder. In this paper the effects of patent height are studied in a duopoly where firms compete in product improvements. Minimal steps of improvements, determined by the height, limit the strategy space of competitors who want to invent around a patent. It is shown that low patents do not affect the natural market equilibrium. A patentholder can lose with medium patent heights, but he becomes a pure monopolist if patents are high. The nonpatentholder can gain with medium heights but is increasingly worse off with higher patents.

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