Patent Economics II Approaches to the Patent System

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Patent Economics IIApproaches to the Patent
System

• Class Notes April 10, 2003
• Law 677 Patent Law Spring 2003
• Professor Wagner

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Todays Agenda

• (Economic) Approaches to the Patent System
• Patents-as-rewards
• Patents-as-prospects
• Patents to avoid rent dissipation

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Introduction to Patent Theory

• Why is it important to have a (some?) theory of
  the patent law?
• Illustrates policy questions
• Explains features of the law
• Suggests doctrinal interpretations, etc.

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The Reward Theory of Patents

• What is the most basic statement of the reward
  theory?
• Why do you think the reward approach is the most
  widely held view?
• Why does Kitch suggest that the reward theory is
  premised on
• The inevitable reduction of output of patented
  goods
• The balancing of output-reduction and
  output-increase

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The Reward Theory

• Kitch suggests a number of features of the patent
  system that cannot be explained by the reward
  theory
• The breadth of the claims
• The requirement for early patenting
• The divergence between when goods are patented
  and when they become commercially viable (see
  table on p. 272)

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The Prospect Theory

• Kitch offers a alternative theory supporting the
  patent system -- the prospect theory
• What is the basic idea?
• How does he analogize to the mineral claims
  system?
• How does the prospect theory explain the puzzling
  aspects of the patent law?
• What does Kitchs theory suggest about the public
  benefits of patents?
• Is there a need to balance protection versus
  costs?
• Are you convinced?

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The Prospect Theory

• Kitch suggests several advantages of the patent
  system when viewed as a prospect system
• Increases efficiency of resource allocation to
  innovation
• Generates incentives to maximize the prospect
  (the invention)
• Enhances the ability to contract for
  complementary information
• Enables signaling
• Reduces costs of controlling technology

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The Prospect Theory

• What are the problems with the prospect theory?
• How do Merges and Nelson suggest that broad
  (prospect) patents can reduce welfare?
• Consider the case-studies they note
• Electrical lighting
• Automobiles and airplanes
• Radio
• Semiconductors
• Bulk chemicals
• Synthetics
• Pharmaceuticals

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Prospect Theory

• Consider the following
• Kitch is most concerned with controlling the
  over-allocation of resources to innovation
• MN view the problem as avoiding under-allocation
  of resources
• But can aspects of the patent system resolve
  both concerns? (That is, perhaps the system is
  designed to prevent both over-allocation and
  under-allocation of resources.)

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Patent Law and Rent Dissipation

• What is rent dissipation?
• Grady and Alexander suggest that the patent law
  is best viewed in terms of avoiding rent
  dissipation. What do they mean?
• How does rent dissipation occur during the
  innovation phase?
• How does rent dissipation occur during the
  commercialization phase?
• What is rent dissipation due to secrecy?

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Patent Law and Rent Dissipation

• GA suggest that rent dissipation theory can
  explain the following (How?)
• Denying patent protection to basic inventions,
  like principles of nature
• Offering broader protection where an initial
  innovation signals a number of possible
  improvements
• How does the GA theory suggest that more
  valuable patents are less good candidates for
  protection?
• What are the problems with the rent dissipation
  theory?

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• Next Class
• Patent Economics III
• Cumulative Innovations Patent Portfolios