On the Division of Profit in Sequential Innovation

Jerry R. Green and Suzanne Scotchmer

RAND Journal of Economics, 1995, vol. 26, issue 1, 20-33

Abstract: In markets with sequential innovation, inventors of derivative improvements might undermine the profit of initial innovators through competition. Profit erosion can be mitigated by broadening the first innovator's patent protection and/or by permitting cooperative agreements between initial innovators and later innovators. We investigate the policy that is most effective at ensuring the first innovator earns a large share of profit from the second-generation products it facilitates. In general, not all the profit can be transferred to the first innovator, and therefore patents should last longer when a sequence of innovations is undertaken by different firms rather than being concentrated in one firm.

Date: 1995
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Working Paper: On the Division of Profit in Sequential Innovation (1993)
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