DOES PRODUCT PATENT REDUCE R&D?

An important discussion in recent years is the introduction of product patentsand the abolition of process patents. In a model with endogenous number of innovatingfirms, we show that whether product patent increases R&D is ambiguous, and depends onthe type of market demand and the cost of R&D. If the market size increases with numberof firms, product patent reduces R&D investment if the cost of R&D is sufficiently large,and higher product differentiation increases the possibility of lower R&D under productpatent. If the market size does not increase with number of firms, product patent alwaysincreases R&D investment. Though, in general, product patent may increase welfare if itreduces R&D investment, we show that, in case of linear demand, welfare is always lowerunder product patent than process patent.