The Economics of Innovation: Volume 286

R&D activities and incentives, together with the pace of the resulting technical progress, have been core issues ever since the pioneering work of Schumpeter (1942) and the consequent debate about the so-called Schumpeterian hypothesis, according to which the higher is the degree of market power enjoyed by a firm, the higher is her incentive to invest in innovation. This debate has received a crucial impulse by Arrow (1962), putting forward convincing argument against the Schumpeterian claim, by pointing out that a firm operating initially under perfect competition should indeed be endowed with the highest possible incentive to strive for an innovation whereby, if successful, she could throw her rivals out of the market and acquire monopoly power over the latter.

The literature on R&D races suggests that noncolluding firms invest excessively in R&D. We show that this result depends critically on the winner-take-all assumption. Although rents continue to be dissipated once the winner-take-all assumption is relaxed because firms in general fail to provide the optimal R&D effort, the mechanisms behind this rent dissipation change with the degree of patent protection. We then illustrate how the patent system can be used to elicit the optimal R&D effort.

In this paper we look at patents as alternative to trade secrets. We disentangle the disclosure motive for patent protection from the traditional reward motive by adjusting the level of patent protection so as to make the innovator just indifferent between patenting and keeping the innovation secret. Thus, we keep the reward (expected profits) to the innovator fixed and focus on ex post efficiency. When duplication is not feasible and secrecy only entails the risk of public disclosure (a leakage), patents and secrets are perfect substitutes. Yet, a distinctive features of trade secret protection is that it allows for independent creation. The duplicative efforts to reproduce a concealed innovation make patents and secrets imperfect substitutes. If such duplicative efforts are actually exerted under secrecy, patents provide the pre-specified incentive to innovate at least social cost. If, however, the threat of duplication induces the innovator to preemptively license her trade secret, and such licensing agreements allow the innovator to appropriate all the saved duplication costs, then secrets can reward innovative activity more efficiently than patents. Thus, the issue of whether patents are socially preferable to secrets boils down to an assessment of the prevalence and the efficiency of trade secret licensing. The available empirical evidence suggests that licensing of trade secret information is limited and so hints at the superiority of patents.

This chapter proposes a survey of the main results produced by the literature on licensing and some original insights, with a particular focus on globalization, North–South models of technology transfer, the issue of how the intellectual property rights influences international licensing, and asymmetric information.

This paper analyzes the stability and the welfare properties of R&D cooperations in an oligopolistic market with n firms. It is shown that the sizes of stable coalitions vary significantly with the kind and the actual value of spillovers, the institutional arrangement of cooperation between the firms and the underlying stability concept. Moreover, the welfare maximizing coalition is rarely a stable equilibrium outcome, hence there is scope for political intervention. However, the informational requirements on part of the policy makers are high, and they are at risk to adopt inappropriate measures that are detrimental to social welfare.

Uncertainty is introduced into a model of strategic R&D. The formation of an R&D cooperative increases the success rate of R&D. This increase in the R&D success rate can be reinterpreted as the realization of scope economies due to cooperation. It appears that within this setting the range of technological spillovers increases for which the formation of R&D cooperatives is beneficial to society. They are always beneficial if economies of scope are large. Absent the realization of economies of scope the traditional result apply in that the technological spillover should exceed some threshold value for R&D cooperatives to be desirable. If the economies of scope are intermediate this threshold value is lowered.

The possibility of an established firm repelling a newcomer's cost reducing technical advances by providing the newcomer access to its currently superior technology, is explored. The oldtimer is supposed to offer his technology in return for the newcomer either ceasing R&D or sharing her findings. It is found that newcomers with the R&D potential to drive the oldtimer out of business cannot be coopted, but that less potent newcomers can. Whenever newcomers are deterred, the product price is higher and technical advance lower than it would be in the absence of a deal.

In this paper we take a close look at those strategic incentives arising in a situation where firms share the costs and profits in a multi-firm project, and bargain for their respective (precommitted) split of cost- and profit-shares. We establish that, when each firm's effort contribution to the joint undertaking is mutually observable (which is often the case in closely collaborative operations) and hence can form basis of the contingent cost- and profit-sharing scheme, it is not the gross economic efficiency but the super-/sub-additivity of the nett returns from effort that directly affects the sustainability of a profile of firms' effort contributions. The (in)efficiency result we obtain in this paper is of different nature from so-called “free riding” or “team competition” problems: the set of sustainable outcomes with bargaining over precommitted cost- and profit-shares is generally neither a superset nor a subset of the sustainable set without bargaining.

Research joint ventures (RJVs) avoid duplication of R&D costs and facilitate knowledge diffusion. However, sharing R&D output intensifies post-innovation market competition and hence hampers firms' incentive to join an RJV. In this paper, RJV formation is modeled as a noncooperative sequential game, as in Bloch (1995, “Endogenous structures of association in oligopoly”, RAND Journal of Economics 26, 537–556). I show that in equilibrium a unique RJV exists, and it comprises of only a subset of the firms in the industry unless R&D cost is low. Moreover, the equilibrium RJV is larger than the size that maximizes the profit per member firm but smaller than the socially optimal size. When firms initially have different marginal costs, various RJV structures can emerge in equilibrium. For some parameter values of the model, large (low-cost) firms join hands in R&D, leaving small (high-cost) firms as outsiders. For other parameter values, a group of large firms invite small firms, instead of other large firms, to form an RJV.

We take a differential game approach to study the optimal choices of managerial firms concerning efforts in product a process innovation. We find the Nash equilibria under the open-loop and closed-loop information structure, and we compare the steady state allocations with the corresponding equilibria of markets populated by standard profit-maximising firms. We find that the managerial incentive leads firm to underinvest in product differentiation and to overinvest in process innovation, as compared to standard profit-maximising firms.

This paper considers a strategic delegation setting with R&D spillovers in a Cournot market. The game we analyze has four stages. First, owners have the option to hire a manager. If they decide to delegate, then in the contracting stage they have to determine the optimal incentives for the managers. In the R&D stage, the levels of investments in research and development are chosen which reduce production costs. Finally, in the production stage quantities offered on the market are selected. We characterize the sub-game perfect outcomes of this game depending on the level of R&D spillovers and derive the following main insights. First, in a case where no spillovers exist, both owners have the incentive to delegate R&D and production decisions to managers. This leads to higher outputs, higher R&D activities, but lower profits for the firms in comparison with an entrepreneurial (owner-managed) firm. These results still hold if the basic production unit costs are high, independent of the existence of spillovers. In these cases delegation leads to an increase in social welfare. Second, we demonstrate that when spillovers exist and basic unit production costs are low, then there are situations where owners delegate but discourage managers from being aggressive. This “soft” commitment leads to lower outputs, lower R&D, but higher profits for the firms in comparison with an entrepreneurial firm. Here, however, delegation results in lower welfare.