Abstract
Abstract We examine the timing and quality of product introduction in an R&D stopping game, where we allow for horizontal and vertical differentiation in the product market. We observe that discontinuous changes in introduction dates can occur as firms’ abilities as researchers change. Further, when the research abilities of the firms differ, either the high ability firm or the low ability firm may be the first mover. The underlying research abilities of the firms determine the social optimality of the entry patterns we observe. Minimum quality standards and novelty requirements can play a role in correcting these suboptimal patterns of entry. While minimum quality standards increase welfare for a large range of research abilities, we find that increasing the novelty requirement does not necessarily increase either the profits or, consequently, the research investment incentives of the initial innovator, contrary to much of the cumulative innovation literature. Indeed, as the effect of policy interventions differs significantly across industries where quality improvement is steep and those where it is flat, targeted policies towards specific industries as are often observed in minimum quality standards are generally preferable to more broad-based policies.
Highlights
This paper studies the effect of two policy instruments, minimum quality standards and novelty requirements of patents, on the timing of introduction of new products
It can modify the effective length of protection of a patent (O’Donoghue, Scotchmer and Thisse, 1998) when the inventive step is defined as a quality margin that must be maintained between innovations in order to obtain a separately patentable innovation
Whether firms “race” is endogenous: while the firms race—and so dissipate profits—when they are both highly skilled, less-skilled firms tend to settle into an equilibrium without pre-emption. We introduce to these models both the possibility that the firms may differ in their research abilities, which we define as the rate at which a researcher can improve product quality of a prototype, the possibility that minimum quality standards may prevent introduction of a product that is of too low a quality, or a patentability requirement may effectively prevent entry with an improvement that is too small a quality increment over what is already on the market
Summary
This paper studies the effect of two policy instruments, minimum quality standards and novelty requirements of patents, on the timing of introduction of new products. Whether firms “race” is endogenous: while the firms race—and so dissipate profits—when they are both highly skilled, less-skilled firms tend to settle into an equilibrium without pre-emption We introduce to these models both the possibility that the firms may differ in their research abilities, which we define as the rate at which a researcher can improve product quality of a prototype, the possibility that minimum quality standards may prevent introduction of a product that is of too low a quality, or a patentability requirement may effectively prevent entry with an improvement that is too small a quality increment over what is already on the market.
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