First Mover Advantages and Optimal Patent Protection

This paper advances the analysis of incentives for technological innovation by examining the conditions under which first mover advantages – e.g., a head start, the necessity for imitators to incur their own research and development costs, production cost advantages derived inter alia through learning by doing, and the reputational “image” advantages of first movers – provide an adequate substitute for patent protection. The paper begins by modifying the pioneering analysis of William Nordhaus to deal with product innovations. Computer simulations then investigate whether profitability under diverse first mover advantages is sufficient to motivate investment in research and development. Cases emerge under which incentives are insufficient without patent protection, most notably, when target markets are small, imitation lags are short, and imitators’ erosion of the innovator’s market share is rapid. But in the majority of cases investigated, innovation is profitable even without patent protection. Tentative implications for patent policy are proposed.