Step by Step Innovation without Mutually Exclusive Patenting: Implications for the Inverted U

Sedgley Norman ()
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Sedgley Norman: Sellinger School of Business, Management Loyola University Maryland, Baltimore, USA

The B.E. Journal of Theoretical Economics, 2023, vol. 23, issue 1, 469-485

Abstract: The step by step model of innovation is a benchmark model in research investigating the relationship between competition and innovation. The model assumes an industry can be in one of two states; leveled or unleveled. In an unleveled state the lagging firm is the only innovator. In a leveled state firms compete in a patent race. In this patent race successful innovation probabilities are mutually exclusive. This formulation provides mathematical tractability, but it has no other justification. I relax this assumption and use numerical simulation to demonstrate that allowing for non mutually exclusive success in innovation has important consequences for the inverted U relationship. The inverted U relationship is no longer a prediction of the model. In addition, the model predicts that patent measures will under count innovation from the leveled state, allowing for an inverted U relationship between competition and patenting under a narrow set of parameter restrictions. This theoretical exercise has important implications for understanding the current state of the empirical record on this topic.

Keywords: patent race; competition; binomial distribution (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejte-2021-0112

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