Innovation and patents

What is an invention

Creating a new idea and overcoming practical difficulties

What is innovation?

The commercialisation of an invention

What is diffusion

Increasing the use of innovation

What types of innovation are there

Product → making products

Process → reduction in COP

Schumpeter

Monopoly associated with most innovation

• have profits to invest

• Willing to take risk of investment

Arrow

Compared monopoly and perfectly competitive firm for process innovation

Arrow case 1

Dramatic reduction in costs

Arrow case 2

Reduction in costs isnt that big

Maximum extent of r is approximately equal to the difference between c and c’

Just tends to be slightly below c, so they have incentive to invest in innovation, because by not investing in it, they would have lower costs

Perfectly competitive firm has more incentive to innovate

What does empirical evidence say about innovation investment?

Oligopoly has most innovation spending

Results of oligopoly

New firms enter until excess profits fall to zero

As they enter, industry output increases, but firm output fall and spending on R&D falls

What is r&d to sales ratio in the short run?

In the long run, what is the sales ratio?

Higher ita is associate with higher R&D expenditure and less firms

Diffusion curve?

Sigmoid

S shape

X axis, time

Y axis, prop. Adopters

Factors affecting rate of diffusion

Communication

Management inertia

Protection of market position

Worker resistance

Risk and liquidity

Regulation

Patents

Patents design

Has Qc’ and second period post innovation

Includes cost of investing → X

Case 1:

X < (r*Qm’)

Cost of innovation is les than the one period return

Meaning in period 2, worthwhile to invest

Case 2

With no patent, innovation isnt worthwhile because X is more expensive than return

There is allocative efficiency, but not at the lowest possible cost

Second best solution, but consumer and producer surplus is higher in period 2 if there is a patent