Intellectual Property Protection: Prevention in Advance or Punishment Afterward

This paper compares two types of Intellectual Property Protection policies, prevention in advance versus punishment afterward, based on a multi-stage duopoly model. We find (i) for advance prevention measures, it is optimal to make only one firm innovate and the other succeed in imitating; (ii) for punishment afterward measures, the optimal policy is to prevent imitation exhaustively; and (iii) prevention in advance is superior to punishment afterward if the latter cannot guarantee an equilibrium in which only one firm innovates; if both measures yield single-firm-innovation, the consequence depends on how imitation affects social welfare.