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Learning by Selling, Knowledge Spillovers, and Patents

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  • Yves Guéron
  • Jihong Lee

Abstract

We examine the incentives for experimentation in the context of innovation and market competition. A monopolist chooses whether to sell early‐stage product or perform costly scale‐up R&D. Early market participation facilitates learning about demand but invites knowledge spillovers and competitors, while R&D acts as a barrier to entry. The firm's optimal policy can exhibit both under‐ and over‐experimentation vis‐à‐vis the socially optimal policy. Patents can control the pace of innovation and restore efficient experimentation. When the surplus from R&D is large, rewarding early‐stage innovation encourages market experimentation and limits wasteful R&D investment. We offer a theory of two‐tier patent policy involving ‘petty’ patents.

Suggested Citation

  • Yves Guéron & Jihong Lee, 2022. "Learning by Selling, Knowledge Spillovers, and Patents," Journal of Industrial Economics, Wiley Blackwell, vol. 70(4), pages 867-912, December.
    • Handle: RePEc:bla:jindec:v:70:y:2022:i:4:p:867-912
    DOI: 10.1111/joie.12309
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    References listed on IDEAS

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