Nancy Gallini (University of Toronto) and Suzanne Scotchmer (University of California, Berkeley)
Forthcoming in Innovation Policy and the Economy, vol.2,
Adam Jaffe, Joshua Lerner and Scott Stern, eds., MIT Press, 2002.
Full Text
The past two decades have seen a boom in research on intellectual property, driven in part by emerging technologies, which have challenged existing protection mechanisms, and by the expanded protection offered under international trade agreements. Economists have weighed in with a range of opinions on the strength of current protection mechanisms, on the optimal design for such mechanisms, and on the relative virtues and flaws of each system. This paper sets out to review the economic literature on “optimal incentive mechanisms,” such as intellectual property, that attempt promote R&D.
Public authorities may want to encourage R&D to promote socially-desirable investments that firms or individuals might otherwise not make. For example, a firm might not be able to profit from its inventions if trade secrecy and first-mover advantages are too weak and its innovations are rapidly imitated by competitors. The firm might then decide not to invest in R&D for research projects that could prove socially beneficial. Several “incentive mechanisms” could remedy this situation: the government might contract for the R&D directly, as it often does with military products; it could also offer a prize for successful inventions (see our recent summary of a paper Shavell and van Ypersele in issue 2002-1); finally, the government might grant intellectual property protections, such as patents. Patents provide an incentive for innovation by allowing firms to obtain monopoly profits from their inventions for a limited period of time.
Objective
The paper examines three questions, and how economists have attempted to answer them.
• Are there natural
market forces that protect inventors and render formal protections or other
incentives unnecessary?
• If not, is intellectual property protection the best incentive system,
or should the technology instead be developed by a public sponsor and offered
for free in the public domain?
• How should intellectual property protection mechanisms be designed
in order to balance the disadvantages of high monopoly prices with the incentives
to innovate?
The authors begin by comparing intellectual property to alternative incentive mechanisms. To that end, they specify three decisions each mechanism affects: whether a project should be undertaken; which firms will do it, and at what rates of investment; and where the funding will come from. The authors then analyze the questions of optimal design, examining research on the ideal length of a patent term and the ideal range of inventions each patent is allowed to cover—the so-called patent “scope” or “breadth.” Next, the paper examines the case of cumulative innovation, when each invention builds upon and overlaps a prior invention. This case is particularly difficult because longer or broader patents may increase incentives for initial inventors but decrease incentives for subsequent inventors. Finally, the authors consider the arguments for and against intellectual property.
Setting and Assumptions
The authors note that other forms of protection, such as keeping an invention
a trade secret, may eliminate the need for formal reward systems; they limit
their analysis to settings in which alternative forms of protection are not
available. The optimal design of intellectual property rights may also be
greatly influenced by the use of contracting mechanisms between private parties,
such as cross-licensing, patent pools, research joint ventures, and other
alliances. For example, it is sometimes argued that the problems patents create
for cumulative innovation can be alleviated by licensing, whereby initial
inventors will not exclude subsequent inventors from the market but will offer
them licenses to gain a share of the profits on the second-stage inventions.
The paper stops short of examining these contracting mechanisms, but it does
note their importance and concedes that a comprehensive understanding of the
incentives and consequences surrounding their use is necessary.
Results
This paper provides a good review of the literature on the economics and legal
issues of intellectual property. Some of the conclusions that the authors
draw from the literature remain open to debate. Gallini and Scotchmer acknowledge
that the situations they study can be very complicated, especially when several
firms and informational uncertainties are involved, and they admit that they
make their conclusions with “some caution.”
One important element is missing from the paper. Given the excellent review of the literature that this piece provides, it would seem natural for the authors to describe the most pressing questions that remain unanswered, and to identify the direction in which they believe the research should proceed. Such recommendations are absent.
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