Jim Whitney Economics 357

III. Property
E. Intellectual property
1. Economic analysis
    a. The economics of intellectual property (IP) (cont'd.)

   Resulting trade-off for private provision of public goods:
    (1) static inefficiency: non-depletability --> underconsumption of existing IP goods w/protection
    (2) dynamic inefficiency: non-exludability --> underproduction of new IP goods w/o protection

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    b. The economics of intellectual property rights (IPRs)

    Basic idea: idea space = a commons, and IPRs claim ownership of part of it

    --Creative endeavor without IPRs

    Without IPRs, would creative endeavor cease?

   (1) Nonpecuniary motivations
    much great literature predates copyright (Dante, Homer, Shakespeare)--motivated by fame, love of art (F122-3)

    (2) First mover advantage
    consumers identify the product with that firm.
    The first firm may be able to establish standards, and consumers are uncertain whether other firms are successfully imitating them

    Ex: Circa 1900 the U.S. did not recognize British copyrights, yet British authors got sizable royalties from their American sales.
    With large fixed costs and time delays due to typesetting, the first publisher (who got the manuscript from the author) had a sizable advantage over pirates (who had to wait for the first publisher to print his edition before they could start pirating it).

    Ex: Lotus received no patent on the idea of a spreadsheet (which would have gone to Visicalc anyway), yet had a large first mover advantage.

    (3) Copying costs

    A creative good may be very expensive to copy: reverse engineering
    Copies also may be worth much less than the originals: paintings
    Some forms of the creative good may be non-copyable: Live performances

 

    --Benefits of IPRs

    (1) Greater incentive for creativity
    (2) Lower costs associated with secrecy
    (3) Greater ability of the owner to coordinate further development--Kitch's prospect theory. (Also see F133)

    There is a tendency to overstate the benefits of IPRs: Many ideas may get discovered eventually even without IPRs
    => the social benefit of IPRs is due to how much sooner we get the idea because of the IPRs
    How soon we want something invented depends in part on how rapidly the cost of inventing it is falling with time. If it costs the same amount to invent it this year as next year, we might as well invent it this year; if it will cost a tenth as much to invent it a year later, we might be better off waiting.

   --Costs of IPRs

    (1) Monopoly power
       excessive protection: example: network externalities which can increase market power--operating system and dependent software. (CU131)

    (2) Cost of enforcement
    fuzzy boundaries the norm in intellectual property. (F118) => enforcement is complicated

    (3) Rent seeking

   Patent races: Two people working in the same area might easily come up with the same (or overlapping) ideas, so there is a serious commons problem in patent law. Indeed, there is often ligitation over who has priority when two labs were working on the same problem.
    If I make my invention a day before you do, I get all the rights to it, you get none. So there is an incentive for an inefficient competition to be first.
    Hence the revenue from licensing a patent might well overstate the social value of what was produced
    Similar to homesteading: homesteading or a patent race takes something from the commons. It eliminates a valuable opportunity (to homestead that piece of land or make that invention) that others previously had => imposes an external cost on others

 

    --Optimal protection for IP
    The question becomes: how much protection to grant:

    Corner solution: No protection
   Is NB1 > NB0

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2. Intellectual property law

    Ex: 1939, Disney paid Igor Stravinsky $6,000 for "Rite of Spring" in Fantasia. "Should Disney own the exclusive right to release the film in video cassette, which generated $360 million in revenues in the first two years after its release in 1996, or are Stravinsky's assignees entitled to some of the money?" (James Zinea. "A Discordant Ruling." Forbes Magazine, October 5, 1998: 66.) (CU135-6) denied royalties

    U.S. Constitution, Article I, Section 8: "The Congress shall have power . . . to promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."

    Note: Constitution does not specify how these two should be treated, but laws do: copyright law for writings, patent laws for inventions.

    We'll look at four types of IPRs:
    a. Patent
    b. Copyright
    c. Trademarks
    d. Trade secrets

    a. Patent

    "European patents for inventions began in the Republic of Venice in 1474 and were formalized in England in the Statute of Monopolies in 1623." (CU123)

    1st US patent law: 1790
    Patents protect new ideas: "a new and useful process, machine, manufacture, or composition of matter, or [a] new and useful improvement thereof." (35 U.S. Code 101)

 

    Lowell v. Lewis, 15 F. Cas. 1018 (1817) --  Judge Story, Circuit Justice (charging jury): "All that the law requires is, that the invention should not be frivolous or injurious to the well-being, good policy, or sound morals of society. The word "useful," therefore, is incorporated into the act in contradistinction to mischievous or immoral. For instance, a new invention to poison people, or to promote debauchery, or to facilitate private assassination, is not a patentable invention. But if the invention steers wide of these objections, whether it be more or less useful is a circumstance very material to the interests of the patentee, but of no importance to the public. If it be not extensively useful, it will silently sink into contempt and disregard." (F132)

  1. What are the facts of the case?
  2. How much does plaintiff recover in the event of a finding of infringement?
  3. What conditions must be met to be entitled to patent protection?
  4. Why doesn't the court bother to devote much effort to determining usefulness?
  5. According to the court opinion, how specifically does patent law promote ultimate dissemination of patented information?

    Summarizes the basic criteria and rationales for patent protection

 


    Rickard v. Du Bon, 103 Fed. 868 (1900) -- Tobacco flecking case. The patent was void for want of utility, "except to deceive." So Du Bon's infringement was OK. Flecked tobacco is of higher quality, so flecking deceived customers, making it pernicious Do Bon won his case and could commit the fraud too. (F131-2)

  1. What are the facts of the case?
  2. What did the Court decide?
  3. What purpose did the invention actually serve in this case?
  4. Why did the court refuse to protect it?
  5. Does the case allow DuBon to market flecked tobacco?
  6. What is ironic about such a result?

    Denies patent protection for inventions with a "pernicious use."

 

    Brenner v. Manson 383 U.S. 519 (1966)

  1. What are the facts of the case?
  2. What did the Supreme Court decide?
  3. What key issue did the decision focus on?
  4. A key distinction in research is between basic and applied research. Which category of research is most affected by this decision?
  5. What does the Court fear in granting patents for basic research?
  6. As discussed in the Court opinion, what alternative do basic researchers have to protect their discoveries?
  7. Why does the Court feel the secrecy incentive is exaggerated?

    Risks discouraging basic research in favor of applied research

 


    Sears, Roebuck & Co v. Stiffel Co. 376 U.S. 225 (1964)

  1. What are the facts of the case?
  2. What did the Supreme Court decide?
  3. When is it legal for a firm to compete copying?
  4. Why does the court conclude that "the consuming public is deeply interested" in the legal right to copy?
  5. What does the Court propose in order to reduce the risk of imperfect information on the part of consumers?

    reinforces priority of competition over monopoly