Market Effects of Patent Reform in the US Semiconductor Industry

I study the US semiconductor industry in the context of 1980s legal reform which strengthened intellectual property rights. Prior to the reform, the industry was highly concentrated in a few vertically integrated firms. Post reform, the entry of small design firms led to a fragmented industry composed of both specialty design firms and traditional production firms. I ask how much of this change in market structure can be attributed to patent reform and how much was the result of positive demand shocks from increased spending in the information technology industry. I introduce a structural model of innovation and patenting in which the entry rate of specialized design firms can increase due to either an increase in patent protection or demand. I fit the model to industry steady state and transitional dynamics using data on firm performance and patenting behavior. Policy experiments indicate the effects of stronger patent protection are minor compared with increased demand.