Discussion paper

DP14692 Patents to Products: Product Innovation and Firm Dynamics

We study the relationship between patents and actual product innovation in the market,
and how this relationship varies with firms' market share. We use textual analysis to
create a new data set that links patents to products of firms in the consumer goods
sector. We find that patent filings are positively associated with subsequent product
innovation by firms, but at least half of product innovation and growth comes from
firms that never patent. We also find that market leaders use patents differently from
followers. Market leaders have lower product innovation rates, though they rely on
patents more. Patents of market leaders relate to higher future sales above and beyond
their effect on product innovation, and these patents are associated with declining
product introduction on the part of competitors, which is consistent with the notion
that market leaders use their patents to limit competition. We then use a model
to analyze the firms' patenting and product innovation decisions. We show that the
private value of a patent is particularly high for large firms as patents protect large
market shares of existing products.

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Citation

Argente, D, S Baslandze, D Hanley and S Moreira (eds) (2020), “DP14692 Patents to Products: Product Innovation and Firm Dynamics”, CEPR Press Discussion Paper No. 14692. https://cepr.org/publications/dp14692