Market Power Screens Willingness-to-Pay

Innovation and Economic Growth, Intellectual Property and Patents

Article Snapshot


Jean Tirole and E. Glen Weyl


The Quarterly Journal of Economics, Vol. 127, No. 4, pp. 1971-2003, 2012


This paper proposes a new method for rewarding innovation by firms.

Policy Relevance

The problems resulting from rewarding innovation with prizes or with patents can be ameliorated by using a hybrid reward system.

Main Points

  • Innovation is expensive to an innovator but often socially beneficial; in order to encourage innovation, innovators must be compensated for their trouble.
  • Governments have historically rewarded innovation with time-limited patents, which grant patent holders a monopoly on their new good for a short period of time. This is effective in encouraging useful innovation, but results in artificially high prices and low quantities for consumers for the duration of the patent.
  • An alternative reward system is to offer cash prizes, but no monopoly, to innovators.
    • The size of the cash prize is usually proposed to be dependent on the revenue generated by the invention in order to avoid rewarding unpopular and so presumably useless innovations.
    • However, this system may is likely to disproportionately reward marginal inventions that capture large market share but do not represent significant advancements.
  • The authors propose a hybrid reward system that resembles a continuum between cash prizes and patents.
  • When it is possible to estimate the value of a given innovation—for example, a cancer treatment with a well-defined increase in quality-adjusted life years—innovation should be rewarded with prize-like compensation.
  • By contrast, when the value of an innovation is unclear, as is often the case in consumer electronics, a patent-like reward should be used.
  • When higher prices result in a much larger supply of an innovation, a patent-like system is preferred.


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