Innovation, Imitation, and Market Structure

How do market structure and the characteristics of goods affect the incentives to create new goods (to innovate) and to copy them (to imitate).In this paper we consider an economy in which goods differ according to their production technology, which determines the market structure, and according to the fraction of R&D (think knowledge or information) that it takes to create them. After innovation takes place, imitation is possible but at some cost which reflects the nature of the good. We show in a dynamic general equilibrium model that the behavior of innovation and imitation are very different for different types of goods and technologies. This in turn has important implications for the protection of intellectual property. We describe the optimal protection of intellectual property for different product types in a calibrated version of this economy. Our results indicate that the optimal patent protection differs a lot for different types of goods and bears little resemblance to current U.S. policy. ∗Affiliations: New York University and NBER and The Central Bank of the Republic of Turkey respectively. We thank the National Science Foundation for support through Grant SES-0111518. 1 presented by Thomas Cooley FRIDAY, March 14, 2008 3:30 pm – 5:00 pm, Room: HOH-706 FBE MACROECONOMICS WORKSHOP JOINT USC ECONOMICS DEPT AND