Tuesday, 20 December 2011Katonomics: how far have we gone?

Regular readers of this weblog have come to appreciate the weekly Katonomics posts from the IPKat's own economist-in-residence Dr Nicola Searle. If you were tuning in to this blog in the hope of catching the next instalment, there isn't one today -- but don't panic! Last week's was the final episode in the first series, but there's a fresh series coming up in January, also penned by our worthy Katonomist Dr N (right)..

Meanwhile, it never hurts to do a spot of revision if you've read the first series before -- especially since some of the earlier posts are encrusted with fascinating comments from readers.  A review of Dr N's posts is even more beneficial if you are one of the many new readers whom the IPKat and his friends feel privileged to welcome to their weblog, since you will soon discover that one of the preoccupations of this blogger is the lack of awareness and understanding which IP owners, lawyers and academics have sometimes displayed towards the discipline by which the performance of IP is so often measured.  So, whether it's a question of "love your friend" or "know your enemy", here's a full list of the first series of Katonomics posts to help bring you up to speed:

No.1: The social contract theory of IP No.2: The economics of trade marks No.3: Evidence-based policy: the challenge of data No.4: Where to look for an IP-oriented economist No.5: The paradox of fashion No.6: The economics of IP in pharmaceuticals

Merpel joins the IPKat in saying a big thank you, Nicola" for all this hard work -- and also for helping to place so many IP economists from Europe and beyond on a platform of scholarship which seemed at one stage to consist entirely of transatlantic personalities.

Posted by Jeremy at 5:15:00 PM

1From ipkitten.blogspot.com/2011/12/katonomics-how-far-have-we-gone.html 2 March 2012

Monday, 7 November 2011

Katonomics 1: An Economic Perspective on IP: The Social Contract Theory of IP

Who or what is Katonomics? There is no science of that name as yet, but it's the title of the promised mini-series on IP economics for IPKat readers -- the vast majority are either not economists or don't think they like them very much, perhaps having been bitten by one at a tender age or, more likely, having found that, while economists talk about their beloved IP rights in cold, abstract terms, governments and policy-makers tend to pay more attention to those of us who are happier dealing with actual events like licensing our friends and suing our foes.

This weblog is proud to welcome its own Katonomist, Nicola Searle, who has kindly agreed to give of her time and effort in order to bring the economics of IP to lawyers in a clear, intelligible, friendly manner by providing the IPKat and his friends with a short series of Katonomics articles. The first installment in the Katonomics series tackles something that even IP lawyers who aren't too focused on economics have some familiarity with: social contract theory.  Let Nicola Searle take it from here:

"An Economic Perspective on IP: The Social Contract Theory of IP 

For the first in this series in economics of IP, I thought I would start by looking at a key economic approach to IP.  Economists look at the IP system and ask “why”?  Why would you have a system that rewards rights holders with monopolies?  Why does the state regulate private transactions?  Why do we spend so much money on a system that appears to benefit the few at the expense of the many?  Yes, these are the questions that keep economists awake at night. 

The short answer to these questions is innovation.  From an economic perspective, innovation contributes to growth and increases the overall welfare of economies (e.g. better medicines, more efficient cars, improved cultural experiences). In order to have long-term, continued innovation, there must be incentives for innovators (for more on this topic, I highly recommend Suzanne Scotchmer’s book Innovation and Incentives). For IP, the incentive created is the legal monopoly created by exclusive rights.  The legal monopoly allows innovators the means to capture the financial rewards of their innovation. 

A popular theory that furthers this incentives-to-innovate concept is the social contract theory (also known as contract theory).  Social contract theory argues that IP is a contract between society and innovators.   Society recognises that innovation is socially beneficial and that the

2From ipkitten.blogspot.com/2011/11/katanomics-1-economic-perspective-on-ip.html 2 March 2012

Looking attentive in Economics classeswas the easy bit. The big problem wasremembering all those funny terms ...

knowledge underlying innovation is intangible.  Given that the knowledge is intangible, innovators may have difficulty capturing the rewards from innovation.  Without rewards, innovators may stop innovating and society loses out. The solution to reward innovators is the IP system. 

However, the IP system is not without costs.   Society grants the innovator a temporary monopoly via exclusive rights.  This temporary monopoly means that the innovation will be sold at lower quantities and higher prices than if there were no monopoly.  This is a cost to society that translates into a benefit for innovators who earn more from their innovation.  Running the IP system is also not without costs as administering and enforcing rights can be expensive (indeed, costs were cited in two of the four points of investigation for the Hargreaves review). In return for these costs to society, the innovator eventually turns the innovation over to the public domain. Once in the public domain, the innovation is no longer constrained by exclusive rights and may be freely

used to develop further innovations. 

The underlying concept is that the short-term inefficiency of the monopoly created by IP is tolerated in order to achieve the long-term efficiency of continued innovation.  Therein lies the social contract: a contract between society and innovators in which innovators reap the rewards to innovation and society benefits from continued innovation.  

Social contract theory differs significantly from other theories of IP including that of the labour-deserve theory (or labour theory of acquisition).  Labour-deserve theory argues that an individual has rights over the fruits of their labour.  For example, I have natural rights over this blog post because I have applied my labour to write it.  To generalise, labour-deserve theory begins with the individual, while social contract theory begins with society.  They both come to the same conclusion: that the IP system should exist.  However, the two theories get there in different ways. 

These are not new concepts.  John Locke looked at labour-deserve theory in the 1700s (Chapter 5 of his second book).  At the same time, Adam Smith argued for property rights as a means of increasing efficiency (see An Inquiry into the Nature and Causes of the Wealth of Nations).  Their contemporary, Johann Gottlieb Fichte, also recognised the tensions between the fairness of rewarding innovation and the social benefits of innovation (see Proof of the Illegality of Reprinting: a Rationale and a Parable).  Debate between these theories is also not new and has erupted many times over the years (for a good discussion cataloguing the historical debates, see Christine MacLeod here [http://www.usc.es/epip/documentos/Christine%20Macleod%27s%20paper2.doc]).  Modern analysis of IP and social contract theory can be found in a number of papers including those of Landes and Posner,  Denicolo and Franzoni and Lemley.  

3From ipkitten.blogspot.com/2011/11/katanomics-1-economic-perspective-on-ip.html 2 March 2012

"Monopoly? I distinctly heardyou say 'temporary monogamy'..."

The debate over copyright term extension is a good example of how social contract theory and other theories can clash.  Under social contract theory, increasing the rewards to an existing innovation represents a violation of the contract.  The innovator and society entered a contract at the time of the publication of the copyright-protected work; later changes to this contract break this agreement.  

  Amendments also fail to provide incentives to innovate: how does extending the term of protection now encourage innovation occurring 50 years ago?  For supporters of labour-deserve theory, term extension is less problematic.  Innovators still deserve to benefit from the fruits of their labour and to receive a “just reward”.  If these fruits are still culturally and economically relevant, why shouldn’t innovators still benefit from their efforts? 

And here, I leave you to contemplate the relative merits of social contract theory with my question of the week: Is IP a social contract or an inherent individual right? Do economists really lose sleep over innovation? Comments on a postcard.  Or in the handy box below".

Okay, readers: you've had your first lesson. What do you think?

Posted by Jeremy at 6:11:00 PM

4From ipkitten.blogspot.com/2011/11/katanomics-1-economic-perspective-on-ip.html 2 March 2012

The IPKat fondly recallsthe days before the currentEurozone crisis, whennations still had wealth ...

Monday, 14 November 2011

Katonomics 2: An Economic Perspective of IP: The Economics of Trade Marks Another slice of Katonomics. The IPKat welcomes new readers who may be unfamiliar with the term 'Katonomics' and reassures them that it's nothing sinister: it's just title of the promised mini-series on IP economics for IPKat readers -- the vast majority are not (yet) economists. This series is brought to you by the IPKat's own Katonomist, Nicola Searle, whose first essay on economics for IP folk, An Economic Perspective on IP: The Social Contract Theory of IP, was warmly welcomed and attracted a large volume of readers' comments (which you can read at the foot of that feature). This week Nicola tackles a delicate subject if ever there was one, the way economics looks at trade marks.  This is what she has to say:

An Economic Perspective of IP: The Economics of Trade Marks 

A number of commentators in my previous post   quite rightly noted that social contract theory is not the one-size-fits-all theory it’s made out to be.  Social contract theory, or the more general concept of incentives to innovate, struggles with some IP rights such as trade marks.  One solution is to argue that trade marks fundamentally differ from patents and copyright and shouldn’t be lumped together.   Let’s take a look at the economics of trade marks. 

To begin with a cost-benefit analysis of trade mark policy, the benefits to the rights holder stem from the exclusive right to the trade mark.  The assumption is that the rights owner will have invested resources in developing and maintaining a brand and trade marks associated with the brand.  The exclusive rights associated with trade marks help prevent appropriation of the trade mark by others, which would diminish the value of the investment. Further analysis of the relationship between marketing, branding and trade marks can be found in Steven Schwarzkopf’s paper here [http://webspace.qmul.ac.uk/pmartins/CGRWP18.pdf].

The benefits to society stem from a combination of information asymmetry and information gathering costs (or search costs).  In information asymmetry, noted by the brilliantly named Nicholas S. Economides, it is assumed that the consumer of a good or service knows less about the good or service than does the producer.  Branding and trade marks allow the producer to signal information about the good or service. 

5From ipkitten.blogspot.com/2011/11/katonomics-2-economic-perspective-of-ip.html 2 March 2012

"Never mind the brand -- justtell me how I can get out of this tin!"

Information gathering (search) costs are related as trade marks benefit consumers by decreasing these costs.  Knowledge about a brand, as communicated through a trade mark, means that a consumer saves resources when making a purchasing decision.  The trade mark serves as an efficient communication symbol.   For example, when looking for an early morning coffee, you may scan the high street looking for a familiar Starbucks or Costa logo.  Instead of researching the attributes of a particular good or service, the consumer may instead search by trade mark.  

Imagine a supermarket trip with no protection for trade marks.  Chocolate manufacturers have decided that customers are willing to pay more for Cadbury’s Dairy Milk and have labelled all milk chocolate as such.  How do you identify the correct chocolately goodness?  Trade marks aid product identification and differentiation, communicate information about a good or service and provide producers with an incentive to maintain a certain level of quality. 

Trade marks and brands also serve an interesting social function.  The social interaction of status signalling and conspicuous consumption allows us to use consumption to signal status.  Visible trade marks make for easy signals. Rather

than researching a person’s status, we infer a level of status from the brands we observe. There is a reason why Fake Fendis exist. 

The direct costs of trade mark policy stem from the costs of running the system (e.g. registrations, enforcement costs) and are similar to those of patents and copyright.  Potential indirect costs such as creating barriers to entry can be attributed to more general branding activities and not necessarily trade marks specifically.  Landes and Posner, in a foundational paper [http://www.jstor.org/pss/725498], call the costs of trade mark policy “modest.” 

But how does this fit into social contract theory? When patents and copyrights expire, they become part of the public domain where they may spur further innovation.  Theoretically, trade marks can last forever. However, their protection may end if the trade mark is not maintained or becomes generic.  In the generic case, the trade mark must have become a common expression (Landes and Posner note that here we delve into economics of language).  The trade mark becomes so beneficial as a means of communication to society that it loses some of its protection. 'Escalator' is a classic example; another is 'heroin'. If you’d like more examples, I suggest you try internet-search-engining-it. 

Thus, far we’ve addressed costs, benefits and public domain aspects of trade marks. However, the argument remains somewhat unsatisfying. You’ll note that I have conspicuously avoided the term “innovation.”  If economists see IP as a policy to provide incentives to innovate, then where is the innovation in trade marks? Landes and Posner argue that trade marks exist to promote efficiency, and not necessarily innovation. The UK IPO published a report [http://www.ipo.gov.uk/ipresearch-tmincentives-full-201107.pdf] this summer, by Christine Greenhalgh and the late Mark Rogers, which very neatly argues that trade marks are correlated with innovation.  They argue that trade marking activity by firms is related to new or improved processes or services.  A

6From ipkitten.blogspot.com/2011/11/katonomics-2-economic-perspective-of-ip.html 2 March 2012

... but is it?

paper [http://www.epip.eu/conferences/epip06/papers/Parallel%20Session%20Papers/DAVIS%20Lee.pdf] at this year’s EPIP event by Lee and Jerome Davis also argues that trade marks are associated with innovation by firms.  Potentially, trade marks serve to protect innovations that may not meet the novelty requirements of other IP rights.  However, the general consensus of economists is that trade mark policy is not fundamentally about incentives to innovate.  Indeed, a key book [Innovation and Incentives by Suzanne Scotchmer, MIT Press]on incentives to innovate does not address trade marks. 

Based on the above analysis, trade mark policy is beneficial from a cost-benefit perspective and has some elements to satisfy the social contract theory.  However, trade marks do not appear to be a good fit for social contract theory as a whole. So, what, dear readers, do you think?  Does trade mark policy function so differently from that of patents and copyright that we should not lump them together?  Are trade marks the exception to the rule? 

Posted by Jeremy at 3:09:00 PM

Definitions from the Economist [http://www.economist.com/economics-a-to-z/a]:

Asymmetric information

When somebody knows more than somebody else. Such asymmetric information can make it difficult for the two people to do business together, which is why economists, especially those practising game theory, are interested in it. Transactions involving asymmetric (or private) information are everywhere. A government selling broadcasting licences does not know what buyers are prepared to pay for them; a lender does not know how likely a borrower is to repay; a used-car seller knows more about the quality of the car being sold than do potential buyers. This kind of asymmetry can distort people's incentives and result in significant inefficiencies.

Efficiency

Getting the most out of the resources used. For a particular sort of efficiency often favoured by economists, see PARETO EFFICIENT.

Pareto efficiency

A situation in which nobody can be made better off without making somebody else worse off. Named after Vilfredo Pareto (1843–1923), an Italian economist. If an economy’s resources are being used inefficiently, it ought to be possible to make somebody better off without anybody else becoming worse off. In reality, change often produces losers as well as winners. Pareto efficiency does not help judge whether this sort of change is economically good or bad.

Search costs

The cost of finding what you want. The economic cost of buying something is not simply the PRICE you pay. Finding what you want and ensuring that it is competitively priced can be expensive, be it the financial cost of physically getting to a marketplace or the OPPORTUNITY COST of time spent fact-finding. Search costs mean that people often take decisions without all

7From ipkitten.blogspot.com/2011/11/katonomics-2-economic-perspective-of-ip.html 2 March 2012

the relevant INFORMATION, which can result in inefficiency. Technological changes such as the internet may sharply reduce search costs, and thus lead to more efficient decision making.

8From ipkitten.blogspot.com/2011/11/katonomics-2-economic-perspective-of-ip.html 2 March 2012

Monday, 21 November 2011

Katonomics 3: Evidence-Based Policy – The challenge of data A third slice of Katonomics. The IPKat again welcomes new readers who may be unfamiliar with the term 'Katonomics'. As regular readers now know, it's the title of a mini-series on IP economics for IPKat readers -- the vast majority of whom are not (yet) economists. This series is brought to you by the IPKat's own Katonomist, Nicola Searle, who turns this week to a theme which seems to excite policymakers today -- the increasing demand for IP policy to be based on evidence, rather than on the cherished tenets of our own received wisdom:

Evidenced Based Policy – The challenge of Data 

Recommendation number one of the Hargreaves Review [http://www.ipo.gov.uk/ipreview-finalreport.pdf] begins with “Government should ensure that development of the IP System is driven as far as possible by objective evidence.” The thrust for evidence-based policy continues and, along with health care and other government policies, Intellectual Property policy looks set for a bit of a nudge [Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein].

Economics is grounded in theory and models, and economists are mildly obsessed by equations, graphs and demand curves. However, the economy has many variables, including, to economists’ great annoyance, irrational beings. In order to ensure that models and theories are robust, they must be tested. A preferred test method is empirical analysis, which examines whether economic policies supported by theory are also supported by evidence.

What constitutes evidence in economics? The current preference is for quantitative as opposed to qualitative methods and data. Data collection is not an easy task. For a lot of economic analysis, the government provides this service (e.g. the Office for National Statistics, the ONS [http://www.ons.gov.uk/ons/index.html]). However, some interesting data may not be collected or made public. Researchers must instead collect their own data or generate it through surveys or experiments. Direct measurement of concepts (e.g. innovation) is not possible, so economists use proxies. For example, wealth serves as a proxy for the standard of living. Even money may be a proxy for the abstract concept of value. 

The economic theories and resulting policies discussed in earlier posts (here [Katonomics 1 and here 2) call for testing. If IP is a means of incentivising innovation, then the innovation and the incentives created by IP should be analysed. Proposed changes to IP policy also merit analysis and, in some cases, require investigation via regulatory impact assessments. 

9From ipkitten.blogspot.com/2011/11/katonomics-3-evidence-based-policy.html 2 March 2012

Not everyone is irrational 

However, how do you measure IP? How do you test whether copyright incentivises creation? What is a trade secret worth? As IP is, by definition, intangible, data analysis is often achieved through proxies. These proxies vary by the type of IP. 

Patent data has long been a favourite of economists. It is a data rich source as patents are formally registered, publicly available, and have useful information such as citations. Further, patent data gets tantalisingly close to a proxy for innovation. The number of times a patent is cited, or the number of claims, suggests the innovative value of the patent. It is not without its problems, for example, newer patents will be less cited ("citation lag"). Dietmar Harhoff has done a lot a work in this area, including this presentation [http://www.epip.eu/papers/20060224/Epip%20Workshop%20Bocconi_Harhoff-Hoisl-Webb.ppt] at an EPIP workshop (with Karin Hoisl and Colin Webb) which examines European patent citations and the problem of citation lags. Harhoff also investigates European patent examination in this paper [http://mansci.journal.informs.org/content/55/12/1969.short] with Stefan Wagner.

While patent data has its problems, copyright data is even more challenging. Unlike patents, no central source for copyright data exists. In particular, piracy data is problematic. A 2010 U.S. government report [http://www.gao.gov/new.items/d10423.pdf] addresses this:

“Three widely cited U.S. government estimates of economic losses resulting from counterfeiting cannot be substantiated due to the absence of underlying studies. Generally, the illicit nature of counterfeiting and piracy makes estimating the economic impact of IP infringements extremely difficult, so assumptions must be used to offset the lack of data.”

To compound this, much of the relevant data (e.g. royalties stemming from licensing copyright material) is held privately. Policy makers may only have access to conclusions based on privately held data and no ability to verify conclusions. This is problematic given the challenges to economic analysis of copyright data and the contentious nature of copyright debates. 

When data is made available, it can offer surprising insights. For example, a computer games developer in the Netherlands, Joost "Oogst" Van Dongen, shared detailed stats on his recent Proun game. Unusually, he offered the game as pay-what-you-want and found that only 1.8% of players actually paid. He also discusses his revenue (about $0.09 per game) and estimates a level of piracy at around 41% based on detailed stats. 

However, where privately held data is unavailable, researchers may use a variety of public data sources to investigate copyright policy. Ruth Towse uses artists' earnings

[http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6435.1999.tb00223.x/abstract] to analyse copyright and the royalty system of payment. In a UK IPO [http://www.ipo.gov.uk/ipresearch-faircomp-201110.pdf] report, Martin Kretschmer uses sales prices of copying devices to investigate the levy system. Richard Watt details other examples of empirical work in a WIPO

10From ipkitten.blogspot.com/2011/11/katonomics-3-evidence-based-policy.html 2 March 2012

[http://www.wipo.int/ip-development/en/economics/pdf/wo_1012_e_ch_3.pdf] paper, which include North American copyright registrations and comparative analysis of book pricing. 

Copyright is not alone in its data challenges. Unregistered rights are particularly tricky; for example, the mere existence of a trade secret may not be known. Even registered rights are complicated; economic analysis of trademarks is limited by the lack of economic data in trade mark registrations. 

Given these challenges to data, how should researchers proceed? Is evaluating policy based on evidence the way forward? Or, for my question of the week, should governments compel rights holders to share data?

Posted by Jeremy at 5:51:00 PM

11From ipkitten.blogspot.com/2011/11/katonomics-3-evidence-based-policy.html 2 March 2012

Monday, 28 November 2011

Katonomics 4: Where to look for an IP-oriented economist

It would be a conceit to suggest that the term 'Katonomics' needs no explanation -- but at least it's starting to throw up a decent score when you feed the word into a search engine. Anyway, as regular readers are probably fed up with being reminded, it's the title of a mini-series on IP economics for IPKat readers, the vast majority of whom are not (yet) economists.

This series is brought to you by the IPKat's own Katonomist, Nicola Searle, who gives economic theory a break this week and turns to a fresh topic. The question is "Where do you look for economists?" and the answer is "Right where they can do the most damage good -- in Intellectual :Property Offices!".

Nicola starts with a disclaimer. This piece is not written entirely by her, having been co-authored by an economist at an IP office who, for the sake of his professional reputation -- if  not his personal safety -- prefers to remain anonymous. They write:

"They’re here … Economists in IP Offices

With the USPTO appointing its first Chief Economist only last year, WIPO publishing its first-ever economics paper [http://www.wipo.int/freepublications/en/intproperty/944/wipo_pub_944_2011.pdf], and the expansion of economic teams elsewhere, it looks like IP economics offices are in vogue. Given the push for evidence-based policy an increase in economists, analysts and statisticians in government IP offices would seem logical. For this post, we’re taking a look at economists in IP offices throughout the world.

While these economic teams are part of public institutions, their growth and nature isn’t obvious, so I recruited an unnamed IP office economist to help [actually, says Merpel, the economist does have a name, but took it out of commission-- a bit like Prince].  This is not an exhaustive overview, but we found 10 Chief Economist Offices and 10 offices with an interest in economics: and we’re sure we have missed some, so please feel free to add to this in the comments or email the IPKat here [ipkatforever-ipblog@yahoo.co.uk]with the subject line

12From ipkitten.blogspot.com/2011/11/katonomics-4-where-to-look-for-ip.html 2 March 2012

Hector saw something twitching in the tall grass ahead:

"it might just be an economist", he thought to himself ...

"Missing Economists".

The actual count of economists is tricky as many economic research functions are performed by a combination of economists, statisticians and analysts. The economic work falls into two general categories: internal evaluations and policy research. Internal evaluations include managing performance of the office and forecasting demand for services such as patent applications. Policy research includes the evidence-based analysis we discussed last week. The use of commissioned, external researchers to conduct policy research is common. As a rough indicator, Europe and Latin America have six offices, each with a dedicated economics or analytical team, North America has three (out of three possibles), Asia has three and Austral-Asia has one.

Chief Economists 

The EPO was perhaps the first to open a Chief Economist office back in 2004, then headed by Dominique Guellec for two years, but he has since returned to the OECD. He was followed by Bruno van Pottelsberghe from 2005 to 2007, and more lately by Nikolaus Thumm -- who joined the EPO from the Swiss Patent Office (it looks like Nikolaus is due for a Wikipedia entry). As of January 2012, the EPO will have a new Economic and Scientific Advisory Board which will also look at economic issues. EPO economics work tends to be outsourced and the Chief Economist is the only active economist in the organisation.

The Canadian IPO was probably second to launch an office, transforming its performance management office into a Chief Economist office in 2006. At the time, the office was managed by Elias Collette who continues as the Chief Economist at the Canadian IP Office. His team of about five people is responsible for economics and performance management.

The UK IPO was likely third when it opened a chief economist office in 2008 but, due to there being only one economist, the work did not gain much traction. In October 2009, the IPO re-launched an economics unit by recruiting Tony Clayton, previously Director of Economic Analysis at the Office of National Statistics, and Benjamin Mitra-Kahn. The economics unit has since expanded to about ten members. The unit is very active, with a large research brief for both commissioned and in-house work.

Other recent economics teams include WIPO where Carsten Fink's Office of Chief Economist was created in 2010 and now has a team of about eight. The economics team is responsible for all of WIPO’s statistical reporting, economic research and performance management. The majority of its work is in-house, but commissioned research is used to create reports. WIPO has also hosted a regular meeting of IP office economists since May 2010; list of participants here [http://www.wipo.int/econ_stat/en/meetings/pdf/ip_econ_br_2010.pdf].

The USPTO opened its office by hiring Stuart Graham in March 2010. The Chief Economist’s office has three full-time members and relies on exchanges with universities and various internal departments to complement its staff.

In France, Laurence Joly has been the economist with the National Institute of Industrial Property since 2007. Her offices commission research projects and manages the “Observatoire

13From ipkitten.blogspot.com/2011/11/katonomics-4-where-to-look-for-ip.html 2 March 2012

de la propriete intellectuelle”.

OHIM announced the opening of their chief economists office in May 2011, appointing Nathan Wajsman -- who is responsible for Economics and performance statistics, with a team of four people.

In Brazil, the director of Institutional Partnership and Technological Information at the National Institute of Industrial Property (INPI), Sergio Paulino de Carvalho, is the lead economist at the office. INPI has a research academy, which includes economists, and also does a range of commissioned work.

The Chilean National Institute of Industrial Property (INAPI) has Luciano Cuervo Moraga, an economic advisor responsible for IP. The institute recently launched a one-year research programme with WIPO and Brazil which has added a second economist focusing on IP issues.

Switzerland opened its economics team in the mid 2000s, with Nikolaus Thumm as the Senior Economic Counsellor (now of the EPO) and Hansueli Stamm is now in that role.

Other offices

Australia is an interesting case where there is a Business Development Section with an economist interest in Directory of Strategy, Research & Ministerial Support, Geoff Sadlier. His team also has the responsibility to report performance management and support both a research institute which focuses on economics of IP and an advisory council.

The Chinese Patent Office (SIPO) has a statistics section which has done work on firm performance, and hosted a WIPO economics seminar back in 2009. Unfortunately, not much else was available on its current activities.

The Danish Patent Office has expanded its analytical unit in the last year but, like SIPO, the majority of its work is not in English, which may be good for some, but bad for our digestion.

Japan has a statistical section which is interested in performance management and statistics. The section tends to do most of its economics through a selection of Japanese academics and an external advisory board.

Like Japan, Korea has a small statistics function in the IP office and no economic capacity at the moment.

Some other names with economic interests

Argentina has Miguel Fralmenti, Head of the International Relations Unit, National Institute of Industrial Property (INPI).

Colombia has Laura Buendia Grigoriu, Head, Regulation Group, Superintendence of Industry and Commerce.

14From ipkitten.blogspot.com/2011/11/katonomics-4-where-to-look-for-ip.html 2 March 2012

Mexico has Antonio Camacho Vargas, Director of Promotion and Technical Information Services, Mexican Institute of Industrial Property (IMPI).

Peru has Santiago Dávila Phillipon, Manager of Economic Studies, National Institute for the Defense of Competition and the Protection of Intellectual Property (INDECOPI).

Last, but not least, Uruguay has Alberto Gestal, National Director, National Directorate of Industrial Property (DNPI).

So, it looks like these days you can’t swing a Kat in an IP office without hitting an economist. However, I’m sure there are offices and people we’ve missed and would appreciate additions or corrections in the comments below".

Posted by Jeremy at 11:24:00 PM

15From ipkitten.blogspot.com/2011/11/katonomics-4-where-to-look-for-ip.html 2 March 2012

Tuesday, 6 December 2011

Katonomics 5: Economics of IP: The Paradox of Fashion

Can this really be the fifth in the IPKat's series of Katonomics posts, on the economics of intellectual property? It is -- and this week our wonderful resident Katonomist Nicola Searle tackles for the first time the economic rules that govern one of the most complex, frustratingly unprotectable and ever-fascinating sectors, the fashion industry. This is what she says:

"The Paradox of Fashion 

Fashion presents a bit of a conundrum; despite relatively weak IP rights, the fashion industry flourishes.  If IP encourages innovation, then how does fashion churn out new designs and trends?  The answer is copying. 

Economists have paid little attention to the fashion industry, let alone IP in the fashion industry.  Indeed, most of the analysis of the topic has been done by non-economists (gasp!). An excellent example is this TED talk [http://www.ted.com/talks/johanna_blakley_lessons_from_fashion_s_free_culture.html] by Johanna Blakely.  Thus, for this post, I will benevolently go interdisciplinary (and economists wonder why we’re accused of being snobs…).      

The fashion industry functions with changing trends which incorporate planned obsolescence.  The industry needs older designs to fall out of fashion (i.e. to become aesthetically obsolete) so that demand can be generated for newer designs.   

According to traditional fashion theory [http://angelasancartier.net/theories-of-fashion], high-end design houses dictate fashion (let’s ignore Crocs).  Starting a trend confirms a design house’s success, creative capacity and ranking in the fashion hierarchy.  The designs displayed in catwalk shows and couture lines are loss-leaders that establish exclusivity while promoting the designer’s cheaper, higher margin lines. 

These designs are then inspired/copied by the high street (as per this WGN blog [http://www.wgsn.com/?q=confirmations&CMP=EMCLIFEML1634%%__AdditionalEmailAttribute1%%]). This copying both confirms high-end design superiority (imitation is flattery) and speeds up the fashion cycle by making designs peak in popularity more quickly.    

In addition to trickle-down design, the industry collectively decides colours.  Ever wonder why every store is carrying chartreuse?  Colour organisations collectively decide seasonal colour palettes.  The benefits are many: economies of scale, increased demand from complementary goods (you’ll need a particular shade of brown to match that chartreuse) and planned obsolescence.  In this instance, the “copying” of colours is organised by industry. 

16From ipkitten.blogspot.com/2011/12/katonomics-5-economics-of-ip-paradox-of.html 2 March 2012

The height of feline fashion?

Furthermore, design houses copy from the past (the “prior art” of fashion).  IPKat readers may have survived the rise and fall of acid-wash jeans, only to find them back in fashion. Kate Middleton’s 2011 wedding dress owes a lot to Grace Kelly’s 1956 dress.  It is difficult to find fashion items that do not borrow from prior fashions.  In patenting terms, you could argue that the inventive step of fashion design is low. 

So we have copying condoned in at least three cases: flowing down the fashion hierarchy (high street copying catwalk), within the industry (colour coordination) and across time (copying prior art.)  For analysis of the business ethics of all this copying, check out Australian academics Hilton et al’s paper [http://www.springerlink.com/content/x4711j07675k6017/]. 

However, this culture of copying is not universally beneficial.  Without the benefits of scale and status of established designers, copying can be damaging for newcomers. Smaller players are relatively more affected if their sales are impacted by copying and lack the resources to seek legal recourse.  Furthermore, the market structure currently allows high-end designers a lead time advantage.  With the advent of fast fashion, clothing “inspired by” high-end designs may reach customers before the original designs (more [http://www.ssrn.com/abstract=1323487] on this by C. Scott Hemphill and Jeannie Suk).  Fast fashion may challenge the current of

copying.

Counterfeiting in fashion is a different story.  A counterfeit good imitates through the use of trade marks or other protected properties without the permission of the owner.  Unlike the lesser sin of being “inspired by,” counterfeiting undeniably infringes IP rights. 

From the consumer side, the consumption of counterfeit fashion goods is often the consumption of counterfeit status goods. A Fendi at a fifth of the price? Fabulous. The economic reasoning behind consumer demand for these goods includes Veblen’s conspicuous consumption, status signalling and reference groups.  Economists are not particularly welcoming to this behaviour and the economics of happiness, as examined by the UK’sAndrew Oswald, argues that we would be happier without it. 

For producers, counterfeiting can damage brands and represent lost sales.  However, the evidence is ambiguous.  As counterfeits are poorer quality than original fashion goods, the products are sufficiently differentiated as to not be substitutes.  Counterfeit goods may advertise or be the “gateway drug” for legitimate goods.  Like piracy, the effects of counterfeit goods are difficult to determine. There are very few empirical economics papers addressing counterfeits and fashion (Yi Qian, who examines Chinese shoe manufacturing [http://ssrn.com/abstract=1104534], is a notable exception.) 

Fashion goods enjoy some IP protection from rights including design rights, trade secrets, trademarks, patents and, to a degree, copyright. As this handy WIPO guide notes, the fashion cycle may be too short to warrant investing in some forms of IP protection.  

17From ipkitten.blogspot.com/2011/12/katonomics-5-economics-of-ip-paradox-of.html 2 March 2012

Increased IP rights for the fashion industry, as currently being argued in the US, are not straightforward.  Determining where rights end and infringement begins is a challenge.  The AmeriKat has noted recent disputes regarding Louboutin’s trade mark over red soles for shoes.  

Increased rights might interfere with the culture of copying.  Tying up fashion’s “prior art” or restricting the trickle-down nature of design could limit the industry’s ability to generate new trends.  The success of the fashion industry despite limited IP protection suggests that lead-time, networks, industry norms and other factors are more important. On the other hand, increased IP rights might protect emerging designers or force designers to innovate around existing rights.  

So, that leaves us with our question of the week, should IP rights be increased for fashion to protect designs?  Or is the current regime sufficient?"

Posted by Jeremy at 3:54:00 AM

18From ipkitten.blogspot.com/2011/12/katonomics-5-economics-of-ip-paradox-of.html 2 March 2012

Monday, 12 December 2011

Katonomics 6: the Economics of IP in Pharmaceuticals

In this, the sixth post in this series of Katonomics, the IPKat weblog's resident Katonomite, Dr Nicola Searle, addresses a subject which is about as close to a red rag to the proverbial bull as one gets in IP law --the long and menacing shadow of economics. But is it a threat, or merely a shadow, and does it darken the horizon or provide welcome shade against the heat of assertions of public policy?  Read on:

Economics of IP in Pharmaceuticals No IP topic presses quite so many buttons for economists (and IPKat readers) as pharmaceuticals.  Patents for medicine touch on the economics of development, health, law, innovation and political economy.  Couple that with key international agreements and widely available data, and you’ve got a hot topic. 

 As early at 1791, Fichte noted the relevance of pharmaceuticals to IP analysis and recounted a tale, in which an alleged infringer of a pharmaceutical patent argues,

“I sell the nostrum much more cheaply than the plaintiff; the lowliest man can thus afford to procure it, unlike at the high price demanded by the monopolist. … Could I but paint a vivid picture for Your Majesty of the groans of the suffering, the rattling throats of the dying, who have been saved by the physic they bought from me!”

 The impact of IP on pharmaceutical innovation is a classic case of marginal analysis of the effect of incentives.   Economic models and policies are evaluated at these margins to assess the power of incentives to influence the marketplace.  For example, some will switch to solar power when it is subsidised.  These are the cases at the margin where the incentive of the subsidy changes decisions. 

 Analysis of the pharmaceutical industry argues just that – that development of medicine only occurs with these incentives.  The high costs of developing new medicines and their easily-copied nature mean that IP protection is necessary. Without the strong incentive of IP protection, these medicines wouldn’t exist but, with IP protection, they do. 

 Society has an interest to incentivise new development as medicines provide important benefits.  This fits nicely into social contract theory.  Society grants medicine companies temporary

19From ipkitten.blogspot.com/2011/12/katonomics-6-economics-of-ip-in.html 2 March 2012

"Perhaps it does kill fleas", said Smokey,"but I've never heard it tick"

monopolies to recover the costs of development in return for improved medicines that eventually become generic. 

 Unfortunately, it’s never that simple.  Public and humanitarian interests in improved health mean that medicine development may occur without IP protection.   Boldrin and Levine note that, of the British Medical Journal’s top 15 medical and pharmaceutical discoveries, only two had patent protection.  The other 13 occurred without the incentive of IP protection. 

 Like many IP-related statistics, the cost of developing pharmaceuticals is also debated (here [http://www.cmaj.ca/content/180/3/279] and here [http://www.sciencebasedmedicine.org/index.php/what-does-a-new-medicine-cost/]).  Each successful medicine must recoup the costs of all the unsuccessful projects, compliance with regulations, clinical trials, marketing, etc. 

 Marketing costs form a large part of the industry’s expenditures and don’t lead to medical advances.  As the daughter of two medical professionals, I enjoyed many a shrimp cocktail courtesy of pharmaceutical companies and their swag kept me well stocked throughout my school years (my Kwell pen made me popular).  Gagnon and Lexchin have calculated [http://www.plosmedicine.org/article/info:doi/10.1371/journal.pmed.0050001] that, in the US, pharmaceutical companies spend 24% of their sales on promotion and 13% on promotion.  As Christine Greenhalgh and Mark Rogers note in their book [Innovation, Intellectual Property, and Economic GrowthChristine Greenhalgh & Mark Rogers, Princeton University Press], two of the top three firms in terms of Community trademarks registrations are pharmaceutical companies. 

 Further debate occurs in the economic development aspects of IP and pharmaceuticals.  Healthy populations, with access to medicines, make for improved economies.  Traditional knowledge may lead to sources of revenue or accusations of biopiracy.  In countries with weak institutions, the regulatory structure of IP could provide a boon to innovation and encourage Foreign Direct Investment.  However, for medicines, the enforcement of IP can result in the decline of the generics industry (as in India) and in reduced access to medicine. To assuage these concerns, TRIPS incorporated compulsory licensing.  

 Even without IP, there are incentives to develop medicines for richer markets. The US and other developed countries are the dominant markets for medicines.  Diseases common in developed countries, such as obesity, receive more attention.  Diseases which might make a huge difference to an economy as a whole, such as malaria, do not enjoy the same market power and potential profitability. 

 Strategic behaviour by pharmaceutical firms to increase the profitability of their medicines via IP makes analysis even more interesting.  When faced with a patent cliff [http://www.bbc.co.uk/news/business-16064606], firms may patent a slow-release version.  Or, to get creative, firms may combine the regulatory system with the IP system to gain monopoly rights over existing medicines, as in this case [http://www.thefreelibrary.com/Adams+Laboratories+Announces+FDA+Approval+of+Mucinex%28TM%29+NDA+And+Is...-a088995483]. 

20From ipkitten.blogspot.com/2011/12/katonomics-6-economics-of-ip-in.html 2 March 2012

 The late Jean Lanjouw devoted her career to analysis of pharmaceuticals and economic development. In a Brookings Institute paper, she suggests that pharmaceutical companies be granted patents in developed or developing countries, but not both.  Effectively, they would have to choose their markets. 

 However, a challenge to price differentiation based on geographical location is that of arbitrage through parallel imports.  If there are large price differences between countries, the law of one price suggests that the prices will converge.  This might reduce the ability of pharmaceutical companies to recoup cost and encourage trade in counterfeits. 

 So, dear readers, please chip in.  Is the pharmaceutical industry the poster child for intellectual monopoly?  Should companies have to choose between IP protection in developed and developing countries?

Posted by Jeremy at 10:47:00 PM

21From ipkitten.blogspot.com/2011/12/katonomics-6-economics-of-ip-in.html 2 March 2012