Optimal patent length and breadth in an R&D driven market with evolving consumer preferences: An evolutionary multi-agent based modeling approach

Abstract

The aims of this paper are twofold. The first is to analyze the interaction between R&D activities of firms and heterogeneous consumer preferences in structuring the evolution of an industry. The second is to explore the effects of patent length and breadth on market outcomes. To answer these research questions, an evolutionary, multi-agent based, sector-level cumulative innovation model is designed. The model addresses supply and demand side of the market simultaneously with the coevolution of heterogeneous consumer preferences, heterogeneous firm knowledge bases and technology levels at the micro level. Firms compete on quality and price of their products in an oligopolistic market whereas consumers, constrained by their computational limits, act to maximize their utility with their product choices in a boundedly rational way. There is continuous firm entry and exit depending on the competitive performance of the firms. The simulation analysis concludes that patent length has a continuous effect on market outcomes whereas patent breadth has a discontinuous effect and the optimum patent policy is a ‘mild’ one with broad patents for a limited period of time to maximize technological progress and total welfare.