Patent races and market structure

This thesis is a theoretical study of relationships between patent races and market structure. The outcome of a patent race can be an important determinant of market structure. For example, whether or not a new firm enters a market may depend upon its winning a patent race against an incumbent firm already in that market. Moreover, market structure can be a major influence upon competition in a patent race. In the example, the asymmetry between incumbent and potential entrant has an effect upon their respective incentives in the patent race. Chapter I discusses models of R and D with uncertainty. We show that, as the degree of correlation between the uncertainties facing rival firms increases, R and D efforts increase under some, but not all, conditions, and the number of active competitors falls. Chapter II discusses the approach of representing patent races as bidding games. We examine a model in which several incumbent firms compete with a number of potential entrants in a patent race, and ask whether the incumbents have an incentive to form a joint venture to deter entry. They do so if and only if the patent does not offer a major cost improvement. In Chapter III we examine the strategic interactions between competitors during the course of a race, in an attempt to clarify (for different types of race) the idea that a race degenerates when one player becomes 'far enough ahead' of his rivals, in a sense made precise. In Chapter IV we examine the evolution of market structure in a duopoly model when there is a sequence of patent races. The nature of competition in the product market is shown to determine whether one firm becomes increasingly dominant as industry leader, or whether there is 'action - reaction' between firms.