Abstract:

Innovation is the creation of intellectual assets; intellectual assets are distinguished by nonconvexities. But different nonconvexities affect outcomes differently. Provided knowledge is finitely expansible, nonrivalry causes no difficulties for the existence and expost efficiency of competitive equilibrium. However, the minimum-size indivisibility in creating intellectual assets renders competitive equilibrium socially inefficient in general, even though existence is maintained. The inefficiencies have the size of Dupuit triangles. Innovation patterns are invariant within a range of legal structures regulating intellectual asset dissemination.

The paper is available, and some less technical economic background useful for this might be Digital Goods and the New Economy.