Patentability, Industry Structure, and Innovation

Robert M. Hunt

Senior Vice President and Associate Director of the Consumer Finance Institute

Revised: August 2004

WP 01-13/R – This paper presents a model of sequential innovation in which industry structure is endogenous and a standard of patentability determines the proportion of all inventions that qualify for protection (in U.S. patent law this standard is called nonobviousness; in Europe it is called the inventive step).

A previous version of this working paper was originally published in August 2001.

The rate of innovation initially rises as this standard is raised from very low levels, but eventually falls as the standard is raised to very high levels. Hence, there is a unique patentability standard that maximizes the rate of innovation. Surprisingly, this critical standard is more stringent for industries disposed to innovate rapidly. The model suggests a number of important implications for patent policy.

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