Bruno Versaevel

Patent pools and dynamic R&D incentives

Patent pools are cooperative agreements between two or more firms to license their related patents as a bundle. In a continuous-time model of multistage innovations, we characterize firms’ incentives to perform R&D when they anticipate the possibility of starting a pool of complementary patents, which can be essential or nonessential. A coalition formation protocol leads the first innovators to start the pool immediately after they patent the essential technologies. The firms invest more than in the no-pool case and increase the speed of R&D for essential technologies as the number of patents progresses to the anticipated endogenous pool size, to the benefit of consumers. There is overinvestment in R&D compared to a joint profit-maximization benchmark. If firms anticipate the addition of nonessential patents to the pool they reduce their R&D efforts for the essential patents at each point in time, resulting in a slower time to market for the pooled technologies.

Horizontal R&D Cooperation and Spillovers: Evidence from France

We use the French portion of the 2002 Community Innovation Survey to test how spillovers a®ect the likelihood that ¯rms cooperate in R&D. Unlike most existing empirical studies, our results clearly support well-established theoretical predictions of the industrial organization literature. We find that a firm which benefits from higher spillovers from her rivals is more likely to cooperate horizontally in R&D. Moreover, the impact of incoming spillovers on the likelihood of horizontal R&D cooperation is positive and statistically significant only when they are above a threshold. Both the value, and the precision of the estimates, increase with the information flow which firms report receiving from their competitors.

Testing Optimal Punishment Mechanisms Under Price Regulation: The Case of the Retail Market for Gasoline

We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.

Patent Pools and Dynamic R&D Incentives

Patent pools are cooperative agreements between several patent owners to bundle the sale of their respective licenses. In this paper we analyze their consequences on the speed of the innovation process. We adopt an ex ante perspective and study the impact of possible pool formation on the incentives to innovate. Because participation in the creation of a pool acts as a bonus reward on R&D activity, we show that a firms investment pattern is upward sloping over time before pool formation. The smaller the set of initial contributors, the higher this effect. A pool formation mechanism based on a proposal by the industry and acceptance/refusal by the competition authority may induce overinvestment in early innovations. It also leads a forward looking regulator to delay the clearance date of the pool. This may result in a pool size that is suboptimal from an ex ante viewpoint.

One Lab, Two Firms, Many Possibilities: on R&D outsourcing in the biopharmaceutical industry

We draw from documented characteristics of the biopharmaceutical industry to construct a model where two �?rms can choose to outsource R&D to an external unit, and/or engage in internal R&D, before competing in a �?nal market. We investigate the distribution of pro�?ts among market participants, and the incentives to coordinate outsourcing activities or to integrate R&D and production. Consistent with the empirical evidence, we �?nd that the sign and magnitude of an aggregate measure of direct (inter-�?rm) and indirect (through the external unit) technological externalities drives the distribution of industry pro�?ts, with higher returns to the external unit when involved in development (clinical trials) than in early-stage research (drug discovery). In the latter case, the delinkage of investment incentives from industry value, together with the ability of �?rms to transfer risks to the external unit, imply a vulnerability of early-stage investors’ returns to negative shocks, and the likely abandonment of projects with economic and medical value. We also �?nd that competition in the equity market makes a buyout by one of the two �?rms more pro�?table to a research biotech than to a clinical services unit, and can stimulate early-stage investments. However, this long-term incentive can be minimal, notably if the superior ef�?ciency of outsourced operations originates from economies of scope that can hardly be exploited when a �?rm takes control of the external unit exclusively for itself. R&D outsourcing thus does not always qualify as a relevant pathway to address the declining productivity in innovation that has characterized the industry over several decades.

Winner-take-all, take-most or pay-some? Optimal protection of innovation in a dynamic model of product development

In a model of investment in product development in duopoly we study the implications of different costs of innovating and imitating for firm strategies and optimal IP protection, relating these to the dynamic characteristics of a stochastic demand. A critical relative cost is identified that determines whether strategic competition takes the form of attrition or preemption, with industry value being maximized when firms neither stall nor hasten entry. Provided that demand growth and volatility are sufficiently low, as typically arises in mature industries, it is socially desirable to provide innovators with complete protection (winner-take-all), implying a preemption race. But when demand is rapidly expanding and highly unpredictable a social optimum can involve a low level of protection, implying attrition, albeit with a positive lower bound for the optimal level of imitation cost (winner-pays-some). Industry profits increase if firms can commit not to seek stronger IP protection once they have innovated, providing a rationale for open standards. While buyouts have ambiguous welfare effects, simple licensing schemes are welfare improving.We study innovation timing and socially optimal intellectual property rights (IPRs) when firms facing market uncertainty invest strategically in product development. If demand growth and volatility are high, attrition occurs and IPRs should ensure the cost of imitation attains a lower bound we identify. If demand growth and volatility are low then provided that entry is business-stealing, IPRs should set the cost of imitation high enough to induce preemption, and possibly winner-take-all preemption. Moreover, the welfare achieved with optimal IPRs is greater with endogenous innovation than if firm roles are predetermined, illustrating the importance of fostering dynamic competition. In extensions we show that firms benefit from open standards, that takeovers have ambiguous welfare effects and that simple licensing schemes are welfare improving.

Coordination and Cooperation in Investment Timing with Externalities

We characterize sequential (preemption) and simultaneous (coordination) equilibria, as well as joint-value maximizing (cooperation) solutions, in a model of investment timing allowing for externalities in both flow pro...ts and investment costs. For two ex-ante symmetric ...rms, either preemption or attrition occur depending on the size of the investment externality. Coordination is less likely with more discounting, as in a repeated game, and more likely with higher growth and volatility. Optimal cooperation involves either monopoly or duopoly investment, the latter being either symmetric or asymmetric. Finally, these characterizations are validated by applications to standard speci...cations of capacity accumulation and of R&D investment. In the former setup, coordination is likelier if installed capacities and lumpy investments are both large. With R&D input choices, if investment synergies are large, coordination and cooperation result in the same outcomes.

On the Tacit Collusion Equilibria of a Dynamic Duopoly Investment Game

This note extends the characterization of simultaneous investment (tacit collusion) equilibria in Boyer, Lasserre and Moreaux (2012). Tacit collusion equilibria may or may not exist, and when they do may involve either finite time investments (type 1) or infinite delay (type 2). The relationship between equilibria and common demand forms is not immediately apparent. We provide the full necessary and sufficient conditions for existence. A simple condition on demand primitives is derived that determines the type of equilibria. Common demand forms are then shown to illustrate both finite-time and infinite-delay tacit collusion.This note further characterizes the tacit collusion equilibria in the investment timing game of Boyer, Lasserre and Moreaux [1]. Tacit collusion equilibria may or may not exist, and when they do may involve either finite time investments (type 1) or infinite delay (type 2). The relationship between equilibria and common demand forms is not immediately apparent. We provide the full necessary and sufficient conditions for existence. A simple condition on demand primitives is derived that determines the type of equilibria. Common demand forms are then shown to illustrate both finite-time and infinite-delay tacit collusion.