Taste for Exclusivity and Intellectual Property Rights

This article analyzes the effects of intellectual property rights protection on innovation in a quality-ladder model in which part of the consumers value being the exclusive consumers of the newest generation of a good. In the case of a monopoly innovator, we show that reducing IP protection can increase the average innovation rate by regularly destroying exclusivity and thereby creating incentives to invent new exclusive goods. In the case where R&D is undertaken by entrants, the innovation rate, however, increases in the strength of IP protection for most market structures. In each case, we derive the welfare-maximizing strength of IP protection.