Monday, August 1, 2011
Posted by D. Daniel Sokol
E. Glen Weyly (Harvard) Jean Tirole (Toulouse) have a new paper on Market Power Screens Willingness-to-Pay.
ABSTRACT: What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property screens out projects generating low consumer surplus per unit sold. We propose a stretch parameterization of demand under which innovations dier in both the size of the market they create and consumers' average willingness-to-pay for them. We solve the resulting multidimensional screening problem by decomposing the analysis into a separate choice of the level and structure of rewards for innovations. Optimal policy generally calls for some market power but never full monopoly pricing. The appropriate degree of market power is determined by a value-weighted average of the innovation supply elasticity multiplied by the log-variance of the ratio of the monopoly prices to quantities, opening our analysis to empirical calibration. Our results also shed light on the pricing of platforms, incentives within rms for product development and public infrastructure.