Imitation, Patent Protection and Welfare

Once a new technology has been invented, there is a credible threat of imitation when patents are long and imitation cost is low. When imitation is credible, the innovator has an incentive to postpone technology adoption for relatively high cost of imitation. The possibility of licensing eliminates or at least reduces the incentive for delayed technology adoption and may increase or decrease social welfare. Further, this paper explains the advantages of two types of licensing contracts, viz. a forward contract on licensing and a simple licensing contract. We show the implications of the availability of the licensing contracts on social welfare and optimal patent protection