Waiting to Imitate: On the Dynamic Pricing of Knowledge

We study the problem of an inventor who brings to the market an innovation that can be legally copied. Imitators may `enter' the market by copying the innovation at a cost or by buying from the inventor the knowledge necessary to reproduce and use the invention. The possibility of contracting dramatically affects the need for patent protection. Indeed, our results reveal that: (i) Imitators wait to enter the market and the inventor becomes a temporary monopolist; (ii) The inventor offers contracts which allow resale of the knowledge by the imitators; (iii) The proffits of the inventor typically increase with the number of potential imitators.