Imitation, Patent Protection and Welfare

Newly developed technologies run the risk of being imitated when patents are long and imitation cost is low. This paper shows that the innovator has the incentive to postpone technology adoption when imitation is a credible threat but imitation cost is not below a certain threshold. The possibility of licensing eliminates or at least reduces the incentive for delayed technology adoption. Further, this paper explains the advantages of a forward licensing contract versus a simple licensing contract in terms of profits and social welfare.

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