Cumulative innovation, open source, and distance to frontier

Abstract

We develop a multistage game in which firms do cumulative research and development (R&D) to complete a lengthy process, and we study whether firms patent intermediate results or release them in Open Source. A patent holder obtains a larger reward in the market, but since in equilibrium it forecloses R&D, it remains alone to complete the process and so pays a larger cost than an Open Source firm. We have Open Source equilibria when R&D is highly complementary, R&D costs are large, and firms are sufficiently different and far from the frontier. We identify two market failures, in the forms of free riding and coordination failure, and we discuss public intervention. 3 Our prediction is broadly consistent with historical evidence. Bessen and Nuvolari (2014) provide examples from the eighteenth century, like, the Bessemer steel, the steam engineers in the Cornish mining district, and the first two decades of power weaving in the US textile industry.

Introduction to the thematic issue on “Regulation in health, environmental and innovation sectors”

“…The next three papers, written by Balletta and Tesoriere (2020), Dewit and Leahy (2020), and Osório and Alberto Pinto (2020) deal with various aspects of the regulation of innovation, in connection with other economic issues.…”

“…The paper by Balletta and Tesoriere (2020) develops a multistage game in which firms conduct cumulative research and development (R&D) that requires a lengthy process, and investigates whether firms patent intermediate results or release them in Open Source. A key assumption is that R&D is sequential and cumulative (i.e., builds on past inventions), as well as complementary across firms in terms of success probabilities.…”