Intellectual Property and the Economics of Product Differentiation

Christopher S. Yoo, University of Pennsylvania Carey Law School


The literature applying the economics of product differentiation to intellectual property (IP) has been called the most important development in the economic analysis of IP in years. Relaxing the assumption that products are homogeneous yields new insights by explaining persistent features of IP markets that the traditional approaches cannot. In addition, it refines the extent to which IP enables rightsholders to earn monopoly profits. It recognizes sources of welfare outside of price-quantity space, which in turn opens up new dimensions along which IP can compete. It also allows for equilibria with different welfare characteristics, making the tendency towards systematic underproduction more contingent and suggesting a broader range of policy options for promoting optimality. This chapter reviews the economics of product differentiation, examining both the monopolistic competition and spatial competition lines of analysis. It then surveys the literature applying these approaches to patent, copyright, and trademark.