PATENT POLICY AND THE DIRECTION OF TECHNOLOGICAL-CHANGE

In this article we examine the interaction between firms' product and process innovation decisions, and the role patent policy can play in d irecting technological change toward a socially efficient mix of innov ations. Product innovation is a variant on a pioneer's new product; pr ocess innovation improves upon the cost efficiency of production. In a model with heterogeneous consumers, we show that an entrant relaxes c ompetition by trading off too much process innovation in favor of prod uct innovation, relative to what the social planner would desire. This bias toward product innovation can be corrected through appropriate c hoice of patent breadths on product and process innovations.