In theory, a patent confers perfect appropriability by granting legal monopoly of an invention for a limited period of time in return for a public disclosure that assures, again in theory, widespread diffusion of social benefits after the patent's expiration. The rationale for this social contract rests on the recognition that technological knowledge has certain attributes of a public good. From this perspective, knowledge, once created, is believed to be freely appropriable by others, and the free-rider problem thus limits the incentive to create new knowledge. By conferring property rights that restrict temporarily the wide use of new knowledge, the patent system is supposed to create the incentive to engage in inventive activity and to undertake the costly investment typically required to reduce an invention to practice.

One of the largest bodies of literature in the field of industrial organization is devoted to the interpretation and testing of several hypotheses advanced by Joseph Schumpeter (1950) concerning innovation and industrial market structure. One set of hypotheses focuses on the role of firm size as a determinant of R&D spending and the rate of technological advance. Another set focuses on the effect of market concentration on R&D and technological advance. In this paper, we reexamine the latter set of hypotheses at the industry level, using new data on R&D appropriability and technological opportunity collected by Levin et al. (1984) in a survey of R&D executives in 130 industries.