Economic perspectives on patent law

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Economic perspectives on patent law

• Vladimir Bastidas Venegas
• Stockholm University
• 08-16 43 19

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Lecture 2007-03-01

• Justifications for patent rights
• Justifications for choosing patents over other
  incentives systems
• Optimal patent design

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Problems addressed by different justifications

• Free rider problem/information as a public good
• Risks of innovation - uncertainty
• Efficient exploitation of innovations
• Dissemination

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Justifications for patent rights

• The incentive-to-invent theory
• The incentive-to-innovate theory
• The prospect theory
• The disclosure theory

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The incentive-to-invent theory

• Anticipation of exclusive right induces ex ante
  RD investments
• Assumptions Drastic decrease of inventions in
  absence of patent protection increased patent
  protection leads to increased RD the lone
  inventor
• Counterarguments Empirical studies show that
  patent protection is weak first-mover advantages
  more efficient protection strong protection may
  discourage second generation innovation patents
  induce duplication costs invention is carried
  out by large corporations and not lone inventors

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The incentive-to-innovate theory

• Patents allow follow-up investments to develop
  and commercialize invention (Schumpeter)
• Distinction between invention and innovation
• Dynamic competition
• Focus on ex post patent grant as opposed to
  incentive-to-invent theory
• Discussion about the size of the innovating firm
  small start-up firms v. monopolist

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The prospect theory

• Efficient exploitation of the prospect given by
  the patent right (Edmund Kitch)
• Assumptions without the control of the patent
  holder assets needed in the commercialization
  process would be overused duplicative efforts
  (in terms of innovation) are negative for society
  
• Counterarguments Anecdotal evidence indicates
  that patent holders seldom utilize the prospect
  in an efficient manner (Merges Nelson)
  empirical evidence suggest that there is the
  problem of the anti-commons (patent thicket)
  holding-up follow-up innovation

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The disclosure theory

• Protection for disclosure (contract theory)
• Avoids duplicative effort
• Allows transactions of technology
• Counterargument if technology can be protected
  through other means disclosure is avoided

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Justifications for choosing patents over other
incentives systems

• Patents
• Prize system, subsidies, reimbursement
• Procurement system (auction)

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Justifications for choosing patents over other
incentives systems

• Problems
• Cost
• Which firm innovates at lowest cost?
• Which firm invests at the optimal rate of
  investment?
• Value
• How can value be verified ex post?

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Justifications for choosing patents over other
incentives systems

• IP (patent) system overcomes the problem of
  discovering costs and values
• Prize system, subsidies, reimbursement require an
  ex post verification of value or otherwise open
  up for opportunism. Prize systems have to be
  adjusted to individual and relative efficiency as
  to make RD investments optimal.
• Procurement system (auction) may choose the most
  efficient firm but results in suboptimal RD
  investments

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Designing the optimal patent protection

• Optimal patent breadth (scope)
• Who should be given more protection? First or
  second generation innovators?
• The possibility of making technology transfer
  agreements

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Optimal patent design

• Nordhaus (1969)
• Protection of innovations
• Deadweight loss
• Gilbert Shapiro (1990)
• Introducing patent scope
• Infinite and narrow patents

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Optimal patent design

• Gallini (1992)
• Scope is the cost of imitation
• Optimal design includes both longevity and scope
• Deadweight loss and duplication costs
• Broad and short patents
• Maurer and Scotchmer (1998)
• Licensing avoids imitation
• GS model applies if licensing is possible

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First v. Second generation of innovation

• What is the effective life of a patent?
• A non-infringing substitute is made
• Minimum requirement for inventive step
• Division of profits between innovators accruing
  to both innovations

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First v. Second generation of innovation

• Scotchmer (1996)
• No protection for second-generation innovation
• Exclusive licensing allows protection of such
  innovations
• Denicolo (2000)
• No protection for second-generation innovations
  results in wasteful duplication
• Patent race for first innovation
• Underinvestment for follow-up innovation

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First v. Second generation of innovation

• Does enhanced protection of first-generation
  innovation allow for follow-up innovation?
• Kitch (1977)
• Prospect theory
• Avoidance of duplication costs
• Merges Nelson (1990)
• Hold-up problem
• Patent holders are not capable of exploiting the
  prospect of fist generation innovation as regards
  follow-up innovation
• Eisenberg and Heller (1998)
• Anti-commons problem
• Licensing does not occur or high transaction
  costs