lecture 2 - intellectual property rights: the role of patents in innovation

28
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

Upload: unumerit

Post on 12-Jan-2015

5.538 views

Category:

Economy & Finance


0 download

DESCRIPTION

 

TRANSCRIPT

Page 1: Lecture 2 - Intellectual property rights: the role of patents in innovation

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

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

IBM vs Apple

� Winners & losers?

0

1

10

100

1000

1985 1987 1989 1991 1993 1995 1997

IBM

Apple

Microsoft

Compaq

Intel

Bron: Worldscope database

0

5

10

15

20

25

30

35

40

45

1981

1983

1985

1987

1989

1991

1993

1995

1997

Bron: Harvard Business School Apple case studies 1992 & 1998

Page 3: Lecture 2 - Intellectual property rights: the role of patents in innovation

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

Page 4: Lecture 2 - Intellectual property rights: the role of patents in innovation

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

Page 5: Lecture 2 - Intellectual property rights: the role of patents in innovation

Designing patents

� Can we design a patent that strikes the balance between incentive and welfare generation?

� Patent length, breadth, width and height

Page 6: Lecture 2 - Intellectual property rights: the role of patents in innovation

Patents and spillovers – How can patents leave spillovers?

� Patentable and non-patentable parts of knowledge

� Standing on the shoulders of giants� Rent spillovers

Page 7: Lecture 2 - Intellectual property rights: the role of patents in innovation

Nordhaus model of patent length

� Minor and drastic innovations

Page 8: Lecture 2 - Intellectual property rights: the role of patents in innovation

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)

Page 9: Lecture 2 - Intellectual property rights: the role of patents in innovation

Nordhaus model of patent length

�minor�(A�Bc) (c�c),

S��

qx

0

A��

B�c d�.

Maximum profit for a monopolist

Value of the consumer surplus

Page 10: Lecture 2 - Intellectual property rights: the role of patents in innovation

Nordhaus model of patent length

c�c

c��R �,

V��T

0

�minor e ���d��R.

V��T

0

c�R �(A�Bc)e ���d��R�c�R �(A�Bc) 1�e ��T

��R.

�V�R

��c�R �(1��)(A�Bc) 1�e ��T

��1�0�

R �� ��c(A�Bc) 1�e ��T

11��.

V��c ��c(A�Bc) 1�e ��T

1�� (A�Bc) 1�e ��T

��

��c(A�Bc) 1�e ��T

11��.

Invention possibilities function

NPV of net profits

Optimal R&D expenditures

Resulting NPV of profits

Page 11: Lecture 2 - Intellectual property rights: the role of patents in innovation

Nordhaus model of patent length

� NPV of profits for varying patent duration

Page 12: Lecture 2 - Intellectual property rights: the role of patents in innovation

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)

Page 13: Lecture 2 - Intellectual property rights: the role of patents in innovation

Nordhaus model of patent length

W�V���

T

�e ���d��V�� e ��T

�.

�� �

qx(c)

qx(c)

A��

B�c d�� 1

2B(c�c)2,

�e ��T

��

12

Bc 2�2 ��c(A�Bc) 1�e ��T

2�1�� e ��T

��

�c (A�Bc) ��c(A�Bc) 1�e ��T

1�� e ��T

�.

Total welfare resulting from innovation

Consumer surplus after patent runs out

Part of total welfare due to increased consumer surplus

Page 14: Lecture 2 - Intellectual property rights: the role of patents in innovation

Nordhaus model of patent length

� Consumer surplus (NPV) as a function of patent duration

Page 15: Lecture 2 - Intellectual property rights: the role of patents in innovation

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

Page 16: Lecture 2 - Intellectual property rights: the role of patents in innovation

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

Page 17: Lecture 2 - Intellectual property rights: the role of patents in innovation

Van Dijk / Klemperer model of patent breadth – Horizontal differentiation

U�v�p ���d if the consumer buys0 otherwise

v�p ���|w ��0|�v� �|w ��b| � w ��b2�

p �

2�. The indifferent

consumer

Page 18: Lecture 2 - Intellectual property rights: the role of patents in innovation

Van Dijk / Klemperer model of patent breadth

��pb2�

p ��1

2�.

��

�p�

b2�

(��1)p �

2��0 � p ��

b���1

1� ,

w ��b�

2(��1), ��p �w � �

b���

1� b�

2(��1).

�1��b

w�

�(b�)d� b 2�(��2)2

8(��1)2.

�w�

0

(p ���)d� b 2��(4��)8 (��1)2

.

�1��2�b 2� (��2)2

8(��1)2�

b 2��(4��)8 (��1)2

�b�

2(��1)b�

��1

1� .

Profit function

Find optimal price

Substitute into indifferent consumer

Consumer welfare loss “right”

Consumer welfare loss “left”

Total welfare loss

Page 19: Lecture 2 - Intellectual property rights: the role of patents in innovation

Van Dijk / Klemperer model of patent breadth

�1��2

��

b � (��2)2

4� (��1)b�

��1

�1� �

b � (4��)4(��1)

b���1

�1��1.

Patent breadth is a tool to vary the ratio of welfare loss to incentive (=profit). Policy: pick the best ratio and adjust patent length

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)

Page 20: Lecture 2 - Intellectual property rights: the role of patents in innovation

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) vsbroad patents: EU parliament debate

Page 21: Lecture 2 - Intellectual property rights: the role of patents in innovation

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

Page 22: Lecture 2 - Intellectual property rights: the role of patents in innovation

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”?

Page 23: Lecture 2 - Intellectual property rights: the role of patents in innovation

Van Dijk model of patent height -Vertical differentiation (quality)

U�v�mf�p if the consumer buys0 otherwise

m � f1�p1�m � f2�p2 � m ��p2�p1

f2�f1

,

x1�p2�p1

f2� f1

, x2�1�p2�p1

f2� f1.

�1�p1

p2�p1

f2� f1, �2�p2�p2

p2�p1

f2� f1.

��1

�p1

�p2�2p1

f2� f1

�0 � p �

1 �12

p2,

��2

�p2

�1�p1�2p2

f2� f1�0 � p �

2 �12

(p1�f2� f1).,

p �

1 �f2�f1

3, p �

2 �2f2�f1

3.

Indifferent consumer

Demand functions

Profit functions

Optimal prices yield a game (Nash equilibrium)

Page 24: Lecture 2 - Intellectual property rights: the role of patents in innovation

Van Dijk model of patent height

Page 25: Lecture 2 - Intellectual property rights: the role of patents in innovation

Van Dijk model of patent height

R(f )��f 2.

V1�f2�f1

9��f 2

1 , V2�4f2�f1

9��f 2

2 ,

�V1

�f1

��19�2�f1 �0 � f1�0,

�V2

�f2

�49�2� f2�0 � f2�

29�

.

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 firmis ruled out

Innovation possibilities function

Net profit functions

Optimal inventive step

Page 26: Lecture 2 - Intellectual property rights: the role of patents in innovation

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?

Page 27: Lecture 2 - Intellectual property rights: the role of patents in innovation

Patent strategies – Granstrand

Page 28: Lecture 2 - Intellectual property rights: the role of patents in innovation

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