Knowledge spillover, licensing and patent protection

This paper investigates the effect of different patent regimes on R&D investment and social welfare in a duopoly market with uncertain R&D process. We find that strong patent protection increases R&D investment of at least one firm but whether both firms’ R&D investment will be more under strong patent protection is ambiguous. While ex-ante welfare is more likely to be higher under strong patent protection, ex-post welfare may be higher under strong patent protection. Whether the possibility of licensing increases both firms’ R&D investment is also ambiguous. Licensing with up-front fixed-fee can increase policy dilemma by increasing the possibility of higher ex-ante welfare under strong patent protection but higher ex-post welfare under weak patent protection. However, the results may be different for licensing contract with per-unit output royalty.