Innovation Fertility and Patent Design

Abstract

It may be advantageous to provide a variety of kinds of patent protection to heterogenous innovations. Innovations which benefit society largely through their use as building blocks to future inventions may require a different scope of protection in order to be encouraged, since expected profits are often decreasing in a products usefulness to others when the others are competitors. We model the problem of designing an optimal patent menu when the fertility of an innovation in generating more innovations cannot be observed when the patent is granted and characterize the optimal menu when breadth is a choice variable of the patent authority. If breadth is not definable at the time of the patent due to uncertainty about the kinds of future products that will arise, the menu can still be implemented with buyout fees. Evidence of heterogeneous fertility is presented using patent data from the US.