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

   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.    


        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


and the short version at


    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


        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:


        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.

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

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