Runner-Up Patents: Is Monopoly Inevitable?

Exclusive patents sacrifice product competition to provide firms incentives to innovate. We characterize an alternative mechanism whereby later inventors are allowed to share the patent if they discover within a certain time period of the first innovator. These runner-up patents may reduce the research incentives but we show that under very general conditions the benefits from increased competition on the product market will outweigh these potential costs and render the system socially beneficial. We thus prove that an efficient tradeoff between research incentives and deadweight loss can be achieved without granting monopolies. Furthermore, we demonstrate that the time window where later inventors can share the patent should become a new policy tool at the disposal of the designer. This instrument will be used in a socially optimal mix with the breadth and the length of the patent and could allow sorting between more or less efficient firms in a differentiated patent policy.