Sequential innovations and intellectual property rights

We analyze a two-stage patent race. In the first phase firms seek to develop a research tool, an innovation that has no commercial value but is necessary to enter the second phase of the race. The firm that completes the second phase of the race first obtains a patent on the final innnovation and enjoys its profits. We ask whether patent protection for the innovator of the research tool is beneficial from the ex ante point of view. We show that there is a range of values of the final innovation such that firms prefer to have no Intellectual Property Rights for research tools