Waiting to Copy: On the Dynamics of the Market for Technology

We examine the appropriability problem of an inventor who brings to the market a successful innovation that can be legally copied. We study this problem in a dynamic model in which imitators can "enter" the market either by copying the invention at a cost or by buying knowledge (a license) from the inventor. The first imitator to enter the market can then resell his acquired knowledge to the remaining imitators. This dynamic interaction in the licensing market dramatically affects the conventional wisdom on the need for intellectual property rights. Our main result reveals that, in equilibrium, imitators delay their entry into the market and thus the inventor retains monopoly rents for some time. Second, we show that the innovator strictly prefers to offer non-exclusive rather than exclusive licenses which would forbid reselling by the imitators. Last, we prove that when the innovator faces a large number of imitators, her equilibrium reward converges to monopoly profits.