The Public Goods Nature of Knowledge

1
The (Public Goods) Nature of Knowledge
Information Goods

• Longitude Example What is the lesson?
• What do these have in common
• Knowledge that DNA is a double helix
• software
• digital music
• Public Goods
• Nonrivalness High cost to create zero cost to
  distribute or use. What is the efficiency
  conclusion?
• Nonexcludability If the good is nonexcludable,
  IP will not work!!

2
Private Goods The competitive market is
efficientprice marginal cost Why is that
efficient?
What if a template must be developed?

Demand curve

Marginal cost
p

-

Clocks

3
Information Goods the market doesnt work(What
is the price with free entry?)(What is the price
with intellectual property?)(Isnt public
funding better? Why or why not?)



Idea (v,c)







mv




p
m



pv





dv













software users


4
What does IP do?

• First, IP creates (as a legal matter)
  excludability.
• Does this solve the public goods problem?
• What about nonrivalness?
• Second, IP provides at least a weak efficiency
  test as to whether the value of investment
  exceeds cost
• Third, IP does a bad job of delegation
• It does not privilege the more efficient firms
• It does not regulate entry and duplication
• Fourth, IP leads to deadweight loss
• Fifth, concentrates costs among the users

5
Intellectual Property Compared to what? Public
Sponsorship?

• 1840s, photography A patent buy-out.
• 1960s and 1970s Super Sonic Transport
• Public support for private enterprise.
• 1700s and 1800s Lyons weavers
• Prizes in a guild
• Napoleon Food preservation
• Invention for the public good
• NIH, NSF Researcher-initiated projects
• NASA Targeted government objectives

6
Prizes

• Targeted versus blue-sky research
• Lyons (blue-sky)
• Napoleons food-preservation (targeted)
• Simple model Invest in a blue-sky idea (v,c)?
• Why not make the price depend on cost?
• Why doesnt the prize-giver get ripped off?
• Needs to make the price depend on value
• Why doesnt the inventor get ripped off?
• The role of IP as a background for prizes
  Photography
• Hyatt and celluoid

7
Simple Prizes and Scarce Ideas

• A single inventor has an idea. He must decide
  whether to invest in it, and we want him to make
  the right decision.
• Model An idea is a pair (v,c) where c is the
  cost of making the idea an innovation and v is
  per-period profit.
• (See the market diagram above.)
• Investment is efficient if (1/r) v gt c .
• In the diagram, what is the defect of patents?
• If we were going to use prizes instead, what
  value of prize should we set?
• (How does the optimal prize relate to v? to c?
• How does this depend on what is observable?
  Verifiable?)

8
Prizes Can the prize be linked to value?

• How should the value of the prize be chosen?
• How was the prize chosen in the case of
  longitude?
• canning? The Lyonnaise silk weavers?
• Would it be better to link the prize to cost?
• What problems to patents and prize have in
  common?

9
Targeted objectivesWhat if there is more than
one idea?

• Contestants 1,2 have ideas (v1,c1) , (v2,c2)
• Need to aggregate information and choose the
  best idea
• Invest in idea-1 if (v1/r-c1) gt
  (v2/r-c2)
• (Not necessarily the lower-cost idea.)
• c2 v2/r
• c1
  v1/r
• How do we choose the best idea?
• Depends on what we can observe.
• What if we can observe both value and cost?
• What if we can observe (verify) value, but not
  cost?

10
Vickrey Auction (mainly for econ fans)

• Reminder Vickrey (2nd-price) auction to auction
  an item.
• Valuations v1,v2,... (Notice that v means
  something different.)
• Want to make sure that the agent with the
  highest valuation gets the object. How does a
  second-price auction do this?
• Application to ideas
• Assume that v1,v2 are observable, but not cost.
• Rules Agents report s1,s2 where s1 (v1/r)-c1
  (surplus)
• Firm 1 wins if s1gts2 (otherwise firm 2 wins)
• Firm 1 then pays the auctioneer s2 (the other
  guys surplus)
• Firm 1 is paid v1 when it delivers the
  innovation.
• Prove
• Neither firm wants to lie about its surplus s1
  or s2
• The winner makes nonnegative profit.

11
Contests Choosing among Ideas

• Fairly easy if value is observable (Vickrey
  auction)
• Really hard if both value and cost are
  unobservable or unverifiable. Why wont an
  auction work? What would you auction?
• Prototype Contest firms develop prototypes
  sponsor chooses
• What is the problem if prototypes are solicited
  without any commitment as to the price that will
  be paid?
• Suppose that the government can make contingent
  contracts before investing -- contingent on
  choosing the prototype.
• Does it solve the problem of (1) ensuring the
  best idea? (2) at cheapest cost?