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The economics of patents

Merit course – 2005
 Motivation: to see “how patents work” and
 how economic theory can help to ...
IBM vs Apple

        Winners & losers?
                                                                              1000...
Technology Spillovers and incentives

 The problem that spillovers create is an
 incentive problem
 This may be solved by ...
The role of patents

 The three Ps:
  – Patronage (e.g., universities)
  – Procurement (e.g., defense or public sector
   ...
Designing patents

 Can we design a patent that strikes the
 balance between incentive and welfare
 generation?
 Patent le...
Patents and spillovers – How can
patents leave spillovers?
 Patentable and non-patentable parts of
 knowledge
 Standing on...
Nordhaus model of patent length

 Minor and drastic innovations
Nordhaus model of patent length

 Longer patents create a longer profit stream
 for the inventor, but at a decreasing rate...
Nordhaus model of patent length


                               Maximum profit for a monopolist
      minor
             ...
Nordhaus model of patent length

                                                                                     Inve...
Nordhaus model of patent length

 NPV of profits for varying patent duration
Nordhaus model of patent length

 Longer patents create less consumer welfare
 (they leave a shorter period for consumers ...
Nordhaus model of patent length

                                                                      Total welfare resul...
Nordhaus model of patent length

 Consumer surplus (NPV) as a function of
 patent duration
Nordhaus model of patent length

   Total welfare as a function of patent duration




Higher demand elasticity decreases ...
Patent breadth

 Systems nature of knowledge: spillovers are
 often in the form of relevant implications by
 outsiders
 In...
Van Dijk / Klemperer model of patent
breadth – Horizontal differentiation
         vp     d if the consumer buys
     U
  ...
Van Dijk / Klemperer model of patent
breadth
                                                               1
            ...
Van Dijk / Klemperer model of patent
breadth
                              1                    1
                2)2
    ...
Patent breadth

 ‘Gold mining’ of patents
  – Genetic technology
  – The importance of applicability of patents
 A trend t...
Prudence in patent breadth

 Systems nature of knowledge: one invention
 depends on another one
 A prudent rule is to leav...
The last aspect of patent protection:
Inventive step
 Every patent must have a minimum degree of
 novelty and must not be ...
Van Dijk model of patent height -
Vertical differentiation (quality)
                v m f p if the consumer buys
       U...
Van Dijk model of patent height
Van Dijk model of patent height

                                                         Innovation possibilities functio...
Strategic patents

 Patents are intended as legal protection from
 imitation
 The Yale survey: only one third of innovatio...
Patent strategies – Granstrand
Strategic patents

 Costs of litigation are an important aspect of
 strategic patenting
 Strategic patenting puts more emp...
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Lecture 2 - Intellectual property rights: the role of patents in innovation

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Transcript of "Lecture 2 - Intellectual property rights: the role of patents in innovation"

  1. 1. The economics of patents Merit course – 2005 Motivation: to see “how patents work” and how economic theory can help to design them the role of patents patent length Other patent dimensions
  2. 2. IBM vs Apple Winners & losers? 1000 45 40 Microsoft 35 100 30 25 Intel 10 20 Compaq 15 Apple 10 1 5 IBM 0 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1985 1987 1989 1991 1993 1995 1997 Bron: Harvard Business School Apple case studies 1992 & 1998 Bron: Worldscope database
  3. 3. Technology Spillovers and incentives The problem that spillovers create is an incentive problem This may be solved by the award of a patent: the legal monopoly to be the only user of an invention Monopolies make an economist alert! Technology spillovers are not totally bad: they are a source of welfare – Example: the history of the personal computer
  4. 4. The role of patents The three Ps: – Patronage (e.g., universities) – Procurement (e.g., defense or public sector research institutes) – Patents Patents and spillovers: publication of patented inventions
  5. 5. Designing patents Can we design a patent that strikes the balance between incentive and welfare generation? Patent length, breadth, width and height
  6. 6. Patents and spillovers – How can patents leave spillovers? Patentable and non-patentable parts of knowledge Standing on the shoulders of giants Rent spillovers
  7. 7. Nordhaus model of patent length Minor and drastic innovations
  8. 8. Nordhaus model of patent length Longer patents create a longer profit stream for the inventor, but at a decreasing rate (profits far away in the future are worth less)
  9. 9. Nordhaus model of patent length Maximum profit for a monopolist minor (A Bc) (c c), qx A Value of the consumer surplus S cd. B 0
  10. 10. Nordhaus model of patent length Invention possibilities function cc R, c T NPV of net profits minor V e d R. 0 T T 1e V c R (A Bc)e d R c R (A Bc) R. 0 T V 1e (1 ) cR (A Bc) 10 R Optimal R&D 1 T 1e expenditures 1 R c(A Bc) . T T 1e 1e 1 V c c(A Bc) (A Bc) Resulting NPV of 1 profits T 1e 1 c(A Bc) .
  11. 11. Nordhaus model of patent length NPV of profits for varying patent duration
  12. 12. Nordhaus model of patent length Longer patents create less consumer welfare (they leave a shorter period for consumers to benefit from all the advantages of the patent)
  13. 13. Nordhaus model of patent length Total welfare resulting T e WV e d V . from innovation T q x(c) A 1 Consumer surplus after B(c c)2, cd B 2 patent runs out q x(c) 2 Part of total welfare due T T T e 12 1e e 2 1 Bc c(A Bc) 2 to increased consumer T T 1e e 1 c (A Bc) c(A Bc) . surplus
  14. 14. Nordhaus model of patent length Consumer surplus (NPV) as a function of patent duration
  15. 15. Nordhaus model of patent length Total welfare as a function of patent duration Higher demand elasticity decreases optimal patent life, higher technological opportunities leads to shorter optimal patent life
  16. 16. Patent breadth Systems nature of knowledge: spillovers are often in the form of relevant implications by outsiders In the spirit of the Nordhaus model: be careful not to prevent too many spillovers from locking out Modeling patent breadth: Horizontal product differentiation
  17. 17. Van Dijk / Klemperer model of patent breadth – Horizontal differentiation vp d if the consumer buys U 0 otherwise b p The indifferent vp |w 0| v |w b| w . 2 2 consumer
  18. 18. Van Dijk / Klemperer model of patent breadth 1 pb p Profit function . 2 2 1 b ( 1)p b 0 p , Find optimal price p 2 2 1 1 Substitute into indifferent b b b w , pw . 2( 1) 2( 1) consumer b Consumer welfare loss “right” b2 ( 2)2 (b )d . 1 1)2 8( w w b 2 (4 ) Consumer welfare loss “left” (p )d . 2 8 ( 1) 0 1 b2 ( 2)2 b 2 (4 ) b b . Total welfare loss 1 2 2( 1) 1 1)2 8 ( 1)2 8(
  19. 19. Van Dijk / Klemperer model of patent breadth 1 1 2)2 b( b b (4 ) b 1 2 1. 4( 1) 1 4( 1) 1 Broad patents are bad, because they sacrifice a lot of consumer surplus for little profits (incentives) Narrow patents are bad, because they sacrifice a lot of consumer surplus for little profits (incentives) Patent breadth is a tool to vary the ratio of welfare loss to incentive (=profit). Policy: pick the best ratio and adjust patent length
  20. 20. Patent breadth ‘Gold mining’ of patents – Genetic technology – The importance of applicability of patents A trend towards broader patents (pro-patent era in the US) Software protection: copyright (narrow) vs broad patents: EU parliament debate
  21. 21. Prudence in patent breadth Systems nature of knowledge: one invention depends on another one A prudent rule is to leave an important part of the relevant implications to outsiders (do not award broad patents on all imaginable applications of a discovery) Genetic research is an important contemporary example
  22. 22. The last aspect of patent protection: Inventive step Every patent must have a minimum degree of novelty and must not be obvious to “someone skilled in the art” – But check some of the patents in patent databases on the web – Would you consider the “one click to buy” system at Amazon.com “not obvious to someone skilled in the art”?
  23. 23. Van Dijk model of patent height - Vertical differentiation (quality) v m f p if the consumer buys U 0 otherwise p2 p1 Indifferent consumer m f1 p 1 m f2 p2 m , f2 f1 p2 p1 p2 p1 x1 , x2 1 . Demand functions f2 f1 f2 f1 p2 p1 p2 p1 Profit functions p1 , p2 p2 . 1 2 f2 f1 f2 f1 p2 2p1 1 1 0 p1 p, 22 p1 f2 f1 p1 2p2 Optimal prices yield a game 1 2 1 0 p2 (p f f )., 2121 p2 f2 f1 (Nash equilibrium) f2 f1 f2 f 1 p1 , p2 2 . 3 3
  24. 24. Van Dijk model of patent height
  25. 25. Van Dijk model of patent height Innovation possibilities function f 2. R(f ) f2 f1 f2 f1 2 2 Net profit functions V1 f1 , V2 4 f2 , 9 9 V1 1 2 f1 0 f1 0, f1 9 Optimal inventive V2 4 2 2 f2 0 f2 . step f2 9 9 When h 2/9 patent height does not become restrictive When h>4/9 the imitator decides not to enter the market When 2/9 < h < 4/9 the first-best choice of the imitating firm is ruled out
  26. 26. Strategic patents Patents are intended as legal protection from imitation The Yale survey: only one third of innovations is protected by a patent Why not the other two thirds? novelty requirements secrecy better alternative afraid of inventing around Can patents serve a different function than just protection?
  27. 27. Patent strategies – Granstrand
  28. 28. Strategic patents Costs of litigation are an important aspect of strategic patenting Strategic patenting puts more emphasis on the non-competitive aspects of patents, and hence on the inefficiencies rather than the welfare-creating effects
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