Dynamic competition and intellectual property rights in a model of product development

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 the private imitation incentive is socially excessive, 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 then greater with endogenous innovation than if firm roles are predetermined, illustrating the importance of fostering dynamic competition. In extensions we show how firms benefit from open standards, takeovers have ambiguous welfare effects and simple licensing schemes are welfare improving.