Patents and Supra-Competitive Prices: Evidence From Consumer Products

Abstract

A patent system is a central tool in innovation policy. The prospect of monopolistic pricing supposedly encourages firms to innovate. However, there is scant empirical evidence supporting the existence of higher markups for patent-protected products. Using an original dataset that links consumer products to the patents that protect them, we study the impact of patent protection on product prices. Exploiting exogenous variations in patent status, we find that a loss of patent protection leads to an 8%–10% drop in product prices. The price drop is larger for more important patents and is more pronounced in more competitive product markets.