Intellectual Property Rights in a Quality-Ladder Model with Persistent Leadership

This article analyzes the effects of intellectual property rights in a quality-ladder model where incumbent firms preemptively innovate in order to keep their position of leadership. The amount of R&D undertaken by incumbents increases if it becomes easier for entrants to replace them and to obtain considerable market power immediately upon entry. Unlike in models with leapfrogging, granting forward protection of infi nite duration reduces growth, and imposing a non-obviousness requirement reduces R&D spending, unless it is only imposed on incumbents. It is analyzed how conditioning IP policy on whether an innovation is carried out by an entrant or an incumbent can increase growth. Moreover, the article studies the effects of conditioning the strength of IP protection on the size of the lead. In cases where incumbents can preempt entry without innovating themselves, an intermediate strength of protection against imitation leads to the highest average rate of growth