Optimal Patent Policy with Endogenous Cross-Border Acquisitions

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The issue of optimal patent protection is of great importance since the inclusion of the trade related aspects of intellectual property rights accord into the purview of the World Trade Organization. Hitherto, the literature has focused on the optimal patent regimes from the perspective of developed and/or developing nations assuming that firms in different countries operate independently. We investigate the interaction between optimal patent regimes and cross-border mergers in a North–South framework. In this scenario, we show that forming cross-border mergers increase welfare and reduce the optimal patent length in both regions by reducing competition in the Southern market. As a result, world welfare under mergers Pareto-dominate both the world welfare obtained without mergers and with patent harmonization. Thus, cross-border mergers constitute an effective way of increasing world welfare.