Endogenous Imitation and Implications for Technology Policy

We present a theory of socially valuable imitation in a model exhibiting strategic interaction between innovating and imitating firms. Allowing for endogenous imitation calls for substantial revisions of technology policy. There will be underinvestment in imitation from a social point of view when imitation leads to competition which is sufficiently intense. For example, with Cournot competition this holds in industries facing sharply decreasing returns or sufficiently price-sensitive demand; it does not hold in industries operating under constant returns. In the former case, it is socially optimal to subsidize not only innovation but also imitation, though at different rates. Rationally determined imitation makes socially optimal patents longer than suggested by earlier models with non-strategic imitation.