Do patents slow down technological progress? Real options in research, patenting, and market introduction

This paper challenges the widely held view in the industrial organization l iterature that patents always speed up technological progress. We introduce a model of an innovating firm with uncertain property right to its innovat ion. The impact of a commitment to an R&D project is to create future optio ns for patenting and market introduction. Each decision undertaken will cha nge the conditions in which the innovator operates. It is shown that an inc rease in patent protection reduces the elasticity of the option value of th e program with respect to the value of the project, raising the threshold v alue of market introduction and enhancing the ability of the innovator to w ait. Thus, while the effect of patent is to raise the rents on and thereby the potential amount of innovations, it also tends to slow down market intr oduction. (C) 2000 Elsevier Science B.V. All rights reserved.