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Patents, imitation and welfare

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We consider the effects of product and process patents on profits and welfare. In a duopoly model, we show that if the cost of imitation is not very large, prisoner's dilemma occurs under process patent, thus creating lower profit of each firm under process patent than under product patent. Welfare is higher under process (product) patent for very small (not very small) cost of imitation. Although the possibility of cross-licensing never makes lower welfare under process patent for all costs of imitation, welfare is never lower under product patent under infinitely repeated game.

Keywords: Cross-licensing; Prisoner's dilemma; Process patent; Product patent; Repeated game; Welfare

Document Type: Research Article


Affiliations: 1: School of Economics, University of Nottingham, Nottingham, UK,The Leverhulme Centre for Research in Globalisation and Economic Policy, University of Nottingham, Nottingham, UK 2: Department of Economics and Finance, College of Business, Tennessee State University, Nashville, USA

Publication date: April 1, 2007

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