Patents, imitation and licensing in an asymmetric dynamic R&D race

R&D is inherently a dynamic process which typically involves different intermediate stages that need to be developed before the completion of the final invention. Firms are not necessarily symmetric in their R&D abilities; some may have an advantage in early stages of the R&D process while others may have advantages in other stages of the process. This paper uses a two-firm asymmetric-ability multistage R&D race model to analyze the effect of patents, imitations and licensing arrangements on the speed of innovation, firm value and consumers' surplus. By using numerical analyses to study the MPE of the R&D race, the paper demonstrates the circumstances under which a weak patent protection regime, that facilitates free imitation of any intermediate technology, may yield a higher consumers' surplus and total surplus than a regime that awards a patent for the final innovation. The advantage of imitation may hold even when we allow for voluntary licensing of intermediate technologies.