Preemption, Leapfrogging, and Competition in Patent Races

Abstract

This paper investigates when patent races will be characterized by vigorous competition and when they will degenerate into a monopoly. Under some conditions, a firm with an arbitrarily small headstart can preempt its rivals. Such 'e-preemption' is shown to depend on whether a firm that is behind in the patent race, as measured by the expected time remaining until discovery, can't 'leapfrog' the competition and become the new leader. An example of an R and D game with random discovery illustrates how e-preemption can occur when leapfrogging is impossible. A multi-stage R and D process allows leapfrogging and thus permits competition. A similar conclusion emerges in a model of a deterministic patent race with imperfect monitoring of rival firms' R and D investment activities.

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