Efficient division of profits from complementary innovations

► Complementary technologies must be discovered to produce a commercial product. ► Firms engaged in research have incentives to preempt competitors, but also to free ride on the activities of firms that discover complementary innovations. ► With one remaining discovery, there is a unique payoff function that supports efficient investment under some assumptions. ► With Poisson discovery and no flow costs, the payoff function that supports efficient investment with one remaining discovery also supports efficient investment with any number of remaining discoveries. ► Common payoff rules, such as equal profit per patent or equal profit per innovator, generally do not support efficient investment to discover complementary technologies.