A Patent Race (Dutta) (This question is harder. It looks at a patent race under very different assump- tions to the 'duel' we played in class. Two firms, A and B, are each considering trying to develop a new p the new widget wins a patent worth $20 million plus a penny. Developing a new widget involves several steps'. The firms alternate moves, with A moving first, until one of them wins the patent. All moves are observed. In each turn, a firm can choose whether to take 0, 1, or 2 development 'steps'. Taking 0 steps in a turn costs that firm So. Taking 1 step in a turn costs $4 million. And taking 2 steps in a turn costs $11 million. For simplicity, assume a zero discount rate. Initially, each firm is 4 steps away from completing development. (a) Describe and explain carefully what will happen in this patent race and why. (Hint: it may help to read Dutta ch 12 (but notice I changed the numbers).)
(b) Very briefly explain what is the economic rationale for granting 'intellectual property rights' such as patents. What are some disadvantages for society of granting such rights?