Optimal patent design with uncertainty and loss-averse innovators
DOI:
https://doi.org/10.18533/ijbsr.v12i01.1431Keywords:
incremental innovation, breakthrough innovation, uncertainty aversion, loss aversion, patent breadth, patent lengthAbstract
Although representing a major engine of economic growth, incremental innovations might not be stimulated enough when patent breadth and patent length are not designed properly. In this paper we model the choice between breakthrough and incremental innovations in the context of a neo- Schumpeterian growth model that accounts for the introduction of new goods and related sunk costs and that assumes uncertainty-averse and loss-averse innovators. Our findings show that innovators' choice in terms of novelty is shaped by patent breadth and length, that affect both the private and the social values of innovation. Accounting for innovators' uncertainty and loss aversion challenges the standard results on optimal patent design.
References
Adams, M.E., Day, G.S. and Dougherty, D. (1998). Enhancing new product development performance: An organizational learning perspective. Journal of Product Innovation Management, 15(5), 403-422.
Aizenman, J. (1997). Investment in new activities and the welfare cost of uncertainty. Journal of Development Economics, 52, 259-277.
Aizenman, J. (1998). Buffer stock and precautionary savings with loss aversion. Journal of International Money and Finance, 17, 931-947.
Arthur, B.W., Ermoliev, Y.K. and Kaniovski, Y.K. (1987).Path-dependent processes and the emergence of macro-structure. European Journal of Operational Research, 30 (3), 294-303.
Banbury, C.M. and Mitchell, W. (1995). The effect of introducing important incremental innovations on market shares and business survival. Strategic Management Journal, 16, 161-182.
Banerjee, P. M. and Campbell, B. A. (2009). Inventor bricolage and firm technology research and development. R&D Management, 39, 473--487.
Battaggion, M.R. and Grieco, D. (2009). Radical innovation and R&D competition. Rivista Italiana degli Economisti, 2, 345-359.
Cardinal, L.B. (2001). Technological innovation in the pharmaceutical industry: the use of organizational control in managing research and development. Organization Science, 12(1), 19-36.
Dewar, R.D. and Dutton J.E. (1996). The adoption of radical and incremental changes: An empirical analysis. Management Science, 32(11), 1422-1433.
Duchesneau T.D., Cohn, S.F. and Dutton, J.E . (1979) A study of innovation in manufacturing: Determinants, processes, and methodological issues. Social Science Research Institute, University of Maine at Orono.
Farell, J. and Soloner, G. (1985). Standardization, compatibility, and Innovation. Rand Journal of Economics, 16, 70-83.
Gallini, N.T. (2002). The economics of patents: lessons from recent U.S. patent reform. Journal of Economic Perspectives, 16(2), 131-154.
Gilboa, I. and Schmeidler, D. (1989). Maxmin expected utility with non-unique prior. Journal of Mathematical Economics, 18(2), 141-153.
Green, J.R., and Scotchmer , S. (1995). On the Division of Profit in Sequential Innovation. The RAND Journal of Economics, 26(1), 20-33.
Gul, F. (1991). A theory of disappointment aversion. Econometrica, 59, 667-686.
Hage, J. (1980). Theory of Organization: Form, Process and Transformation. Wile: New York.
Henderson, R. (1993). Underinvestment and incompetence as responses to radical innovation: Evidence from the photolithographic alignment equipment industry. Rand Journal of Economics, 24, 248-270.
Henderson, R.M. and Clark, K.B. (1990). Architectural innovation: The reconfiguration of existing product technologies and the failure of established firms. Administrative Science Quarterly, 35, 9- 32.
Hopenhayn, H.A. and Mitchell, M.F. ( 2001). Innovation variety and patent breadth. RAND Journal of Economics, 32(1), 152-166.
Kaluzny, A., Veney, J.E. and Gentry , J.T. (1972). Innovation of health services: A comparative study of hospitals and health departments. Quarterly Health Society, 52(1), 51--82.
Leifer, R., Colarelli O'Connor G. and Rice M. Implementing radical innovation in mature firms: The role of hubs. Academy of Management Review, 3, 102-113.
Lundvall, B.A. (1992). (ed.). National Systems of Innovation: Towards a Theory and Interactive Learning. London, Pinters Publishers.
Matutes, C., Regibeau, P., and Rockett, K. (1996). Optimal patent design and the diffusion of innovations. RAND Journal of Economics, 27(1), 60-83.
Merges, R. and Nelson, R. R. (1990). On the complex economics of patent scope. Columbia Law Review 90, 839-916.
Nord, W.R. and Tucker, S. (1987). Implementing Routine and Radical Innovations. Lexington Books: Lexington, MA .
Nordhaus, W.D. (1969). An economic theory of technological change, American Economic Review, 59(2), 18-28.
O'Connor, G.C. (1998). Market learning and radical innovation: A cross case comparison of eight radical innovation projects. Journal of Product Innovation Management, 15(2), 151-166.
O'Donoughue, T., Scotchmer, S. and Thisse, J.F. (1998). Journal of Economics & Management Strategy, 7(1), 1--32.
Prokop, J., Regibeau, P., and Rockett, K. (2010). Minimum quality standards and novelty requirements in a one-short development race. Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, 4(15), 1-49.
Puga, D. and Trefler, D. (2010). Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries. Journal of Development Economics, 91(1), 64-76.
Regibeau, P., and Rockett, K. (2010). Innovation cycles and learning at the patent office: does the early patent get the delay? The Journal of Industrial Economics, 57(2).
Romer, P. M. (1994). The origins of endogenous growth. Journal of Economic Perspectives, 8(1), 3-22. Scotchmer , S. (1991). Standing on the shoulders of giants: cumulative research and the patent law.
Journal of Economic Perspectives,5(1), 29-41.
Shaver, K.G. (1995). The entrepreneurial personality myth. Business and Economic Review, 41(3), 20- 23.
Sorescu, A., Chandy, R. and Prabhu, J. (2003). Sources and financial consequences of radical innovation. Journal of Marketing, 66, 82-102.
Witt, U. (1997). Lock-in' vs. 'critical masses': Industrial change under network externalities. International Journal of Industrial Organization, 15, 753-773.
Rosenberg, N. (1982). Inside the Black Box: Technology and Economics. Cambridge University Press, Cambridge.
Downloads
Published
Issue
Section
License
Copyright (c) 2022 Daniela Grieco
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
