An Analysis of the Optimal Patent Design Problem with Vertical Differentiation and Monopolistic R&D

This article analyzes the optimal patent design problem in a setting with vertical differentiation and monopoly in R&D stage. With duration and breadth (novelty and/or non-obviousness) as a patent policy instrument, we prove that the patent with finite duration and broad breadth is optimal. Our conclusion inherits the classical economic spirit of balancing invention incentive with the social cost of patent protection. Without patent, socially desirable invention could not be achieved, whereas the patent monopoly during patent duration prevents consumers from enjoying product improvement resulting from invention. In our model, patent duration and breadth jointly play a role of providing minimum incentive to invent - patent breadth should be just broad enough to cover R&D cost of the inventor. While our conclusion regarding patent duration does not depend upon modeling parameters such as the difficulty of R&D, nature of consumers' preferences and interest rate, optimal strength of protection in terms of patent breadth indeed depends on them. In practice, since the policy decisions regarding patent breadth are made after the granting of a patent, we believe that our conclusion is quite robust for policy implementation.