Learning by Selling, Knowledge Spillovers, and Patents

Yves Guéron and Jihong Lee

Journal of Industrial Economics, 2022, vol. 70, issue 4, 867-912

Abstract: We examine the incentives for experimentation in the context of innovation and market competition. A monopolist chooses whether to sell early‐stage product or perform costly scale‐up R&D. Early market participation facilitates learning about demand but invites knowledge spillovers and competitors, while R&D acts as a barrier to entry. The firm's optimal policy can exhibit both under‐ and over‐experimentation vis‐à‐vis the socially optimal policy. Patents can control the pace of innovation and restore efficient experimentation. When the surplus from R&D is large, rewarding early‐stage innovation encourages market experimentation and limits wasteful R&D investment. We offer a theory of two‐tier patent policy involving ‘petty’ patents.

Date: 2022
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