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ABSTRACT:
Many products—including microprocessors, telecommunications devices, and on-line auction services—make use of multiple technologies, each of which is essential to make or sell the product. This paper examines how alternative intellectual property regimes and legal institutions affect investment in the R&D necessary to develop these complex technologies. We posit several reasonable properties for an innovation reward scheme and show that any scheme possessing all of these properties cannot support the first-best R&D levels. We show that it is feasible to support efficient investment as a private equilibrium if one or more of these properties are relaxed. We also analyze the effects of a simple regime in which payoffs are proportional to patent holdings, and the regime that arises when any one intellectual property owner can obtain an injunction to block sale of the product.

SUGGESTED CITATION:
Richard J. Gilbert and Michael L. Katz, "Efficient Division of Profits from Complementary Innovations" (June 1, 2007). Competition Policy Center. Paper CPC07-076.
http://repositories.cdlib.org/iber/cpc/CPC07-076