This thesis models a patent race with a differential game approach. Firms strategically invest in R&D and produce knowledge in order to innovate. Whether knowledge is substitutable to the existing knowledge pool affects firm’s incentives to invest in R&D. After innovating successfully, the innovator patents on its techniques so that their opponents cannot infringe. However, a patent system indirectly ensures the monopoly power of the innovator in a product market, which reduces the social welfare. The endogenous benefit of a patent holder is evaluated and an optimal patent policy is suggested in order to balance out the loss of the social welfare and innovation incentives. Besides, the production process usually contains several techniques with different patents and this collection forms a patent portfolio. A model of a patent portfolio race explains why some innovation such as an open-source software without patenting can also be as successful as a private software product.

This thesis has been written within the framework of the Doctoral Program European

Doctorate in Economics – Erasmus Mundus (EDE-EM), with the purpose of obtaining a joint

doctorate degree. The thesis was prepared in the Department of Economics and Business at the

University of Amsterdam and in the Department of Business Administration at the Bielefeld

University.