Innovation and Imitation with and without Intellectual Property Rights

An extensive empirical literature indicates that returns from innovation are appropriated primarily via mechanisms other than formal intellectual property rights – and that ‘imitation’ is itself a costly activity. However most theory assumes the pure nonrivalry of ‘ideas’ with its implication that, in the absence of intellectual property (for example under an ‘open source’ regime), innovation (and welfare) is zero. This paper introduces a formal model of innovation based on imperfect competition in which imitation is costly and an innovator has a first-mover advantage. Without intellectual property, a significant amount of innovation still occurs and welfare may actually be higher than with intellectual property.