Recall our example of an investment of $100,000 in research that yields a pioneering invention that has no commercial value, and a subsequent investment of $50,000 in development that yields an improvement that has commercial value of $1 million. Assume that Firm A is uniquely situated to do the pioneering research, and Firm B is uniquely situated to develop the application. Predict the difference in investment resulting from a broad patent law and a narrow patent law. In making your prediction, distinguish between a situation in which transaction costs prevent Firm A and Firm B from bargaining with each other and a situation in which transaction costs of bargaining are zero.

Firm A is uniquely situated to the pioneering research and firm B is uniquely situated to application development. There are significant differences arising from broad patent law and narrow patent law. Firm A conducting pioneering research and Firm B conducting development application in this situation the incentive problem is solved when transaction cost is zero. When the transaction cost is zero the breadth of the patent will not matter to the economic efficiency So long as the can bargain with each other. The bargain between inventors is cost-less and makes efficient contracts.

When the transaction cost obstructs the bargaining between the suppliers of pioneering research of and development of application problem arises. The solutions to the problem are lubricating bargaining and allocate rights to the firm who values the most.

Patent protection for the pioneering inventions should be broader for the little standalone value. In contrast patent protection for pioneering invention should be narrower for large standalone value.

Hence the above difference lies in investment from broader patent law and that of the narrower patent law.