Alex Tabarrok
Fri, 17 Nov 2000 12:48:38 -0800
I do not want to get into a debate on the morality of patents - there is plenty of that in the Armchair archive. On the economics here are some notes and references written for another purpose which may be of interest. Patents can *reduce* investment in R&D in *theory* as well as in practice. There are several ways in which this can occur. First, consider a single firm in an industry with many firms and suppose that the firms are competitive in the sense that patents compete with patents, i.e. the latest technology replaces the previous technology. Now consider a policy which makes patents harder to get. On the one hand this reduces the return to R&D since fewer discoveries will be patentable but on the other any patented discover is likely to dominate the market for a longer period of time. That is, making a patent harder to get reduces the probability of getting a patent but it increases the economic life of the patent. Recall, the idea relies on a structure in which your patent competes with future patents. Thus, making patents more difficult to get reduces the probability that you will get a patent but also reduces the probability of competition from a competitor's future patent, conditional on you getting a patent. It can be shown that the second effect can dominate the first so that making patents more difficult to get actually increases R&D. See Hunt, Robert. 1999. Patent Reform: A Mixed Blessing for the U.S. Economy? Federal Reserve Bank of Philadelphia, Business Review. Nov/Dec. and the same author's FRB of Phil. Working Paper. Both available on the net. For the first see the link below, for the second search under working papers at the FRB of Phil. site. http://www.phil.frb.org/files/br/brnd99rh.pdf Patents can also reduce innovation when one patent builds upon another. This is especially possible with business method patents. (Note the author refers to "Internet patents" while actually internet patents are merely the most obvious example of the larger class of "business method" patents.) Consider why ideas such as Newton's law of gravity are not patentable, one reason is that such ideas generate a host of other secondary implications, ideas and inventions which would certainly be reduced in number should the primary idea be patentable. Business method patents may be more like ideas than specific inventions. More could be said on this. See Bessen and Maskin "Sequential Innovation, Patents and Imitation" Working Paper available at http://www.researchoninnovation.org/patent.pdf and the short version at http://ksgwww.harvard.edu/iip/econ/bessen.html For evidence on the strategic use of patents, see the paper "The Patent Paradox Revised: Determinants of Patenting in the US Semiconductor industry," by Bronwyn Hall and Rosemarie Ziedonis available on Hall's web page at http://elsa.berkeley.edu/~bhhall/index.html More generally, it would be interesting to think of what sort of industries benefit from patents and what sort of industries are harmed and why? It's hard to see a large pharmaceutical industry existing without some patent protection. On the other hand there seems no reason why semi-conductors could not exist without patent protection as they did up until the mid 1980's (see the Hunt article). What accounts for these differences? Are there any principles involved which could help to improve the awarding of patents? Is it really a case of all or nothing? What improvements to the current system might the author recommend? One modest suggestion comes from Robert Merges see his paper "As Many as Six Impossible Patents before Breakfast" available at: http://www.law.berkeley.edu:80/institutes/bclt/pubs/merges/ In addition to public policy changes the author might want to think about market mechanisms. A few thoughts can be found in: "The Contractual Alternative to Patents" (with Roger E. Meiners), International Review of Law and Economics 1 (1981), pp. 227-231. On the issue of reform the author may also want to examine the excellent paper by Michael Kremer Kremer, Michael. 1998. Patent Buyouts. QJE. (Nov): 1137-1167. Another benefit of patents is the diffusion of information. Trade secrecy is an alternative to patents. Thus the gains from getting rid of patents may be less than believed if firms then invest more in keeping their ideas secret - thus, there will still be monopolies although not government granted monopolies. Second, it could even be the case that the public nature of the patent increases information diffusion enough to make patents superior to no-patents. Certainly, on the margin, this idea suggests that we should patent ideas which can be kept secret if not patented but not other processes, eg. we should not allow a patent on one-click buying since this idea could not be kept secret if there was no patent. Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]