Patents and innovation (and competition) · When do patents encourage innovation? Theory One...

Patents and innovation (and competition)Bronwyn H. HallUC Berkeley, U of Maastricht, NBER, and IFS London

EP/STOA Brussels �November 2006

Patent system as viewed by a “two-handed” economist

creates short-term monopolies, which may become long-term in network industries

facilitates entry of new or small firms with limited assets; enables vertical disintegration

Competition

impedes the combination of new ideas & inventions; raises transaction costs;inhibits cumulative invention

creates an incentive for R&D and innovation investments

InnovationNegativePositiveEffects on


Traditional (simplistic) view of patents� Trade off limited term right to exclude

(monopoly) in return for incentive to innovate (and reveal)�Good for innovation�Bad for competition

� But……


Patents may help competition

� Increase dynamic competition by facilitating entry� Useful for securing financing in knowledge-intensive

industries (where there are few tangible assets)� Can lead to competition-enhancing vertical

disintegration by facilitating trade in technology (specialization; interface standardization)� Chemicals - Arora, Fosfuri, Gambardella� Semiconductor design firms – Hall & Ziedonis


Patents may inhibit innovation

� The patent thicket – problem of contracting when many inputs are essential

� High transaction costs lead to breakdown (Heller-Eisenberg)� Negotiations fail due to holdup (Scotchmer)

� Large numbers of patents in a given area, impossibility of adequate search

� Ex post holdup by patentholder after costs are sunk (many examples)

� Given litigation costs, even “invalid” patents can be enforced


When do patents encourage innovation?� Theory

�One patent/one product/static – yes�One patent/one product/cumulative innovation

– yes, but licensing has some problems�Many differentiated patents/products with

cumulative innovation – not if the distribution of value has a “thick” upper tail (Bessen and Maskin 2006)


When do patents encourage innovation?� Evidence

�Historical investigations of changes in patent systems

�Recent look at software/business method patents in the US

�Firm surveys


Historical evidence

� 19 century (variation across Europe/US)� Moser (2005) finds little effect on overall innovation, but change

in focus� Lerner (2001) finds increase in patenting by foreigners but no

increase by firms within country or in Britain (that is, no increase in innovation)

� 20th century� Park and Ginarte – 60 countries, 1960-90. Strength of IPR

(including coverage of pharma) positive for R&D in developed countries

� Branstetter & Sakakibara – increasing patent scope in Japan (1988) did not increase R&D

� Baldwin et al – Canadian innovation survey. Innovation causes patenting, but patenting does not seem to increase innovation


Software patents in the US

� 1994/1995 CAFC decisions led to USPTO guidelines in May 1995� Market value of software firms (esp. applications)

initially falls� However, software patents are more valuable than

other patents to the firms that own them post-1995� In general, firms are less likely to enter product

classes in which there are more software patents� However, firms that hold software patents are more

likely to enter these markets and less likely to exit

EP/STOA Brussels November 2006

Survey evidence

� Industrial R&D managers in the US� Yale survey (Levin, Klevorick, Nelson, and Winter

1983)� Carnegie-Mellon survey (Cohen, Nelson, and Walsh

1994)� EU innovation surveys

� 1993 CIS for Norway, Germany, Luxembourg, the Netherlands, Belgium, Denmark, and Ireland – 2,849 R&D-performing firms (reported in Arundel 2001)

EP/STOA Brussels November 2006

US surveys

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US surveys


1993 CIS (Arundel 2001)


Where are patents effective?

� US - product:� 1983: drugs, plastics, chemicals; steel, pumpingequipment, auto parts, measuring devices, medicalinstruments� 1994: medical instruments, drugs, special purposemachinery, auto parts

� US - process:� 1983: drugs, oil, chemicals, plastics, steel, pumpingequipment � 1994: none, but drugs, oil, medical instruments highest

� Europe� 2000: chemicals (40% rate them first), pharma not included


A useful taxonomy

� “discrete” product industries� food, textiles, chemicals including oil and plastics,

pharmaceuticals, metals, and metal products� patents used to exclude, and sometimes for licensing; also to

prevent litigation� “complex” product technologies

� machinery, computers, electrical equipment, electronic components, instruments, and transportation equipment

� patents used in negotiations (cross licensing and other), and toprevent litigation

� In general, patents more important for appropriability in discrete product industries

� Strategic uses (cross licensing, negotiations) greater in “complex” product industries


Conclusions

� The role of patents in encouraging innovation is ambiguous� Positive on balance in discrete product industries� Neutral or negative in complex product industries� BUT considerable heterogeneity within industry

� Patents may actually help competition if they facilitate entry or leapfrogging


Patent policy reforms

� Raise the bar – higher inventive step, stricter non-obvious standard� Helps quality, by reducing numbers� Benefit/cost ratio likely to be larger for higher step� Reduces size of thicket

� Assess damages on proportional basis (to contribution to product), especially if asserter is not working the patent

� Some specifically US reforms

Patents and innovation (and competition) · When do patents encourage innovation? Theory One...

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