R&D in Duopoly with Intellectual Property Protection Mechanism

We examine the situation in which firms attempt to fully appropriate returns to their own R&D investment through the intellectual property protection mechanism. To do this, we set up three different games: asymmetric IPP, symmetric IPP, and non-IPP regimes. Each game consists of two stages: each firm first undertakes a cost-reducing R&D investment non-cooperatively, and then engages in Cournot competition. We show that the R&D spillover encourages the R&D and the production of the firm with the intellectual property protection but discourages those of other firm without it. We confirm that the rival’s R&D investment without IPP backfires itself due to the boomerang effect of the R&D investment as Choi (2002) mentioned. The social welfare decreases (increases) with R&D spillover when the cost of the intellectual property protection is relatively large (sufficiently low). In addition, if more firms engage in the use of the mechanism, the social welfare becomes lower. In this sense, our finding argues against the public support of generating a large volume of domestic IP.