IMITATION, PATENT PROTECTION AND WELFARE

Once a new technology has been invented, there is a credible threat of imitationwhen patents are long and imitation cost is low. When imitation is credible, the innovator hasan incentive to postpone technology adoption for relatively high cost of imitation. Thepossibility of licensing eliminates or at least reduces the incentive for delayed technologyadoption and may increase or decrease social welfare. Further, this paper explains theadvantages of two types of licensing contracts, viz. a forward contract on licensing and asimple licensing contract. We show the implications of the availability of the licensingcontracts on social welfare and optimal patent protection.