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I study how patent policy-characterized by patent length and forward protection-affects Research and Development (R&D) dynamics, leadership persistence, and market structure. Firms' R&D investments increase as the patent's expiration date approaches. Through forward protection, followers internalize the leader's replacement effect. In protective systems, this internalization is substantial, reversing Arrow's traditional result: followers invest less than leaders at every moment of the patent's life. I study the policy that maximizes innovative activity. Overly protective policies decrease innovation pace through two mechanisms: delaying firms' investments toward the end of the patent's life and decreasing the number of firms performing R&D.

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Price announcements—similar to the ones made by tech firms at media events—are effective in deterring innovation. By announcing (and setting) a high price, a firm increases its rivals’ short-run profits, reducing the rival firms’ incentives to innovate by magnifying their Arrow’s replacement effect. We show that the equilibrium prices are greater and research and development (R&D) investments lower relative to when price announcements cannot be used strategically. We call this the R&D deterrence effect of price and show that it induces equilibrium prices that may exceed the multiproduct monopoly prices and even dissipate the consumer benefits of innovation. This paper was accepted by Joshua Gans, business strategy.