Patents: Incentives for R&D or Marketing?

Kurt Brekke () and Odd Rune Straume

No 12/05, Working Papers in Economics from University of Bergen, Department of Economics

Abstract: We analyse how a patent-holding (incumbent) firm may strategically use advertising ex ante to a¤ect the R&D investments in new (di¤eren- tiated) products, and thus the ex post market structure in the industry. We derive exact conditions for advertising and R&D being substitute strategies for an incumbent firm and show that it may over-invest in advertising to reduce the incentive for an entrant to invest in R&D, thereby reducing the probability of a new product on the market. In this case, a more generous patent policy implies that a larger share of the patent rent is spent on marketing, relative to R&D. Our model, which is particularly fitted to the pharmaceutical industry, is analysed both within a general framework and in a more specific setting of informative advertising.

Keywords: Marketing; Research & Development; Pharmaceuticals (search for similar items in EconPapers)
JEL-codes: I11 L13 O31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2005-04-05
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