Intellectual property rights policy against imitations of product innovations under vertical product differentiation

This study examines how governments should protect product innovation when innovative and imitative firms compete under vertical product differentiation. Assuming that the innovator implements product innovations by incurring costs and the imitator imitates the innovation for free, we find that the government allows imitations to some extent even when an innovator is a domestic firm and imitative products are imported. Moreover, the government regulates imitations even when an imitator is a domestic firm and innovative products are imported. We also find that tightening protection for innovation could enhance the profits of an imitator, and more developed countries tend to protect innovation. These findings theoretically support the results of empirical studies on this topic.