Patent Breadth, Patent Life and the Pace of Technological Improvement.

In active investment climates where firms sequentially improve each other's products, a patent can terminate either because it expires or because a noninfringing innovation displaces it in the market. The patent breadth and patent life together determine which of these occurs first. We distinguish "lagging" breadth, which protects against imitation, from "leading" breadth, which protects against new improved products. We show that if ideas for improvements are frequent then leading breadth is a necessary supplement to lagging breadth. We compare two types of patent policy with leading breadth: (i) patents are finite but very broad, so that the effective life of a patent coincides with its statutory life, and (ii) patents are long but narrow, so that the effective life of a patent ends when a better product replaces it. The former policy improves the diffusion of new products, but the latter has lower R&D; costs.