Patent protection under endogenous product differentiation

Abstract

It is generally believed that a weak patent protection makes the consumers and the society better off compared to a strong patent protection by increasing the intensity of competition if the weak patent protection does not affect innovation. We show that this conclusion may not hold if the innovator can take other non-production strategies, such as product differentiation, to reduce the intensity of product-market competition. A weak patent protection may reduce consumer surplus and social welfare by inducing product differentiation by the innovator. We show that the type of product-market competition and the market demand function play important roles in this respect. Hence, there can be an argument for a strong patent protection even if it does not affect innovation.

Government subsidization and corporate product strategies: evidence from Chinese exporters

“…First, a firm’s choice of competition strategy is unobservable and difficult to measure though it can be inferred from the degree of product differentiation (e.g. Smith, 1956; Dickson & Ginter, 1987; Mukherjee, 2014; Hoberg & Phillips, 2016). Using transaction-level international trade data of China exporters, we construct a novel measure of product differentiation to capture the extent to which an exporter’s product space differs from that of its competitors.…”