Complementary research strategies, first-mover advantage and the inefficiency of patents

In a realistic framework where the potential innovators’ research lines are imperfectly correlated and imitation takes some time, this paper studies an industry regulated by an authority which can tax (subsidize) the firms’ pure profits (R&D expenditures). By comparing the market equilibrium emerging when there is patent protection with the market equilibrium emerging without patents, the paper finds that social welfare is higher in the absence of patents. This result is driven by the fact that—without patents--more than one successful inventor may implement its discovery and enter the market, thus reducing the deadweight loss due to imperfect competition.