Uncertainty, Patent Length and Firm R&D: a Comment

In a recent paper, Goel (1996) analyses the effect of patent length on firm's R&D in a model where the timing of innovations is stochastic. He concludes that: 'Higher patent length does not necessarily lead to more R&D spending' (1996, p. 77). More precisely, 'in projects with high probabilities of innovation success firms might actually reduce their R&D spending when the patent length increases' (1996, p. 78). This conclusion, however, is flawed. The purpose of this note is to correct Goel's analysis, showing that in his model an increase in patent's length unambiguously leads to higher R&D investment.¹     

Pollution-reducing innovations under taxes or permits

This paper compares the effects of effluent taxes and pollutionpermits when a pollution-reducing innovation is in prospect.If the government can adjust the level of taxes and permitsafter the innovation has occurred, taxes and permits are fullyequivalent. The equivalence breaks down, however, when the governmentcan pre-commit. In this case, taxes give a higher incentiveto invest in R&D than permits when the post-innovation outputlevel is sufficiently high. The welfare ranking of taxes andpermits is then analyzed. Loosely speaking, taxes are superiorwhen the social damage associated with pollution is not toohigh.     

Sequential innovation and the patent-antitrust conflict

I examine antitrust policy in a model of cumulative innovation,arguing that collusion between successive patentees (e.g. throughpatent pools or cross-licensing agreements) may be sociallybeneficial under certain circumstances, even if the patentsinvolved are competing rather than complementary or blocking.Collusion stimulates investment in second-generation innovations,which is welfare-improving if their social returns exceed privatereturns. However, it discourages investment in first-generationinnovations. Thus, for the pooling of subsequent patents tobe beneficial, the non-appropriable returns from the secondinnovation must be large and it must be costly to achieve bycomparison with the first.     

Specific and Ad Valorem Taxation in Asymmetric Cournot Oligopolies

This paper compares ad valorem and specific taxes in asymmetric homogenous Cournot oligopolies with constant marginal costs. We show that for any given level of industry output, ad valorem taxes are superior to specific taxes in terms of revenue raised. If the tax rates are sufficiently high, for any given specific tax one can find an ad valorem tax that leads to greater tax revenue, consumer surplus, and industry profits.     

Compatibility and Bundling with Generalist and Specialist Firms

I analyze compatibility and bundling choices when one generalist firm offering both components of a system competes against two specialist firms each supplying one component only (but not the same one). I show that the generalist firm may have an incentive to choose incompatibility or engage in pure bundling when one component is less differentiated than the other. In this case, the system is more differentiated than the relatively undifferentiated component, and so under incompatibility the specialist firm that produces the undifferentiated component will relax price competition. This may result in higher profits for some of the competing firms.