Controlling Prices to Increase Social Welfare
Main Menu Previous Topic Next Topic
We must carefully note that arbitrarily long patents are not always optimal in this model. Here, we design a demand curve specifically to break the assumptions of Gilbert and Shapiro. We select the curve
As you can see from the graph below, the social cost to profit ratio does not increase monotonically as it did for the curves we selected previously. Hence, if the minimum feasible price falls within a particular range - say the minimal price is 3 on this graph - it will not be optimal. Rather, a lower social cost to profit ratio can be achieved at higher price. Hence, a higher price results in a lower total social cost over the length of the patent.
Previous Slide Next Slide