Economics and patents

Patents are legal instruments intended to encourage innovation by providing a limited monopoly to the inventor (or their assignee) in return for the disclosure of the invention. The underlying assumption being innovation is encouraged because an inventor can secure exclusive rights, and therefore a higher probability of financial rewards in the market place. The publication of the invention is mandatory to get a patent. Keeping the same invention as a trade secret, rather than disclose by publication, could prove valuable well beyond the time of any limited patent term, but at the risk of congenial invention through third party.

Macroeconomic perspective

The patent system has an impact on the economy as a whole. The benefits of new results, once the research is publicly known, are available to the whole economy in the relevant field, thereby bringing advantages to all parties in that field, though reducing the direct return to the party performing the pioneering research. This reduces economic incentive for a party to conduct research and innovate.^{[citation needed]}

The effects of patents on a given market may vary widely according to the type of market, and whether there are other barriers to entry (e.g., business methods versus regulated medications).^{[citation needed]}

Even in socialist monopole economies, the adherence to international patent laws was or becomes strict, as the effect is reciprocal for public economy, as soon as the level of technology development in these economies creates comparable advantage.^{[citation needed]}

Microeconomic perspective

The economics surrounding a single patent, or group of patents, revolves around the balance between the expense of obtaining and maintaining the patent(s), and the income derived from owning that/those patents.^{[citation needed]}

The grant of a patent provides the inventor temporarily with an exclusive legal right, thereby securing a means to redeem the costs of research (by charging a higher price for its invention or by license fees from others who wish to practice it). Invention is slightly advanced as people are encouraged to research and invent by the individual financial rewards of doing so.

A patent is an exclusionary right - preventing others from entering the market - and so its effect may be to increase the patent proprietor's income from that market. The major economic effect is the exclusivity period of the patent rights, when exploitation pays back for the enterprise that funded research and development. However, patenting alone does not guarantee for marketing success.

The right to exclude others from entering market with copies is, however, potentially extremely valuable as it can mean total exclusivity in that market for the duration of the patent (generally 20 years from filing). For example, worldwide sales of a patented pharmaceutical can be millions of dollars per day, whereas the generic equivalent sells for less than half the price. A good example of the financial rewards available to the small business from excluding large competitors from a market is the success of the Dyson vacuum cleaner.

Income improvement from a patent is difficult to measure. One may attempt to measure the difference in price of an "improved" product patent, or compare with the price of the product in markets where (or when) it were not patented. More directly measurable income is that which is received from the licensing or sale of patent rights, or from successful litigation of infringement.

Patent valuation

See also: Intellectual property valuation

Patents are not intrinsically valuable. Rather, a patent claiming an invention with market demand would likely have economic value because the patent holder can exclude others from making, importing, using, and offering for sale, or selling that invention throughout the jurisdiction (the U.S.A. for example ) and sell the product at a monopoly price. Without alternative suppliers for the patented good or technology, the price the patentee is able to charge would likely be greater than the competitive price (the price in a competitive equilibrium). This portion of incremental profit would only be attributable to the patent and would therefore be the value of the patent.

Patent value, like value of other property, may fluctuate over time, as markets change. What was once a pioneering invention may be soon outsold by an unpatented (and non-infringing) competitor catering to fringe adopters with products having features even more desirable than the invention. Contrarily, a strong patent grip could stagnate a narrow market as innovation is no longer justified, eventually resulting in reduced demand (for outmoded and over-priced products), and thus reduced patent value, as the market moves away.^{[citation needed]}

A particularly difficult question of value arises where inventors/owners use their patents to extract other advantages without actually marketing the invention (e.g., cross-licensing of related patents to avoid litigation, or suppressing a technology that could compete with the owner's other products). How can one determine the value of a patented product (and the underlying patent) that has not actually been produced, let alone sold in any quantity? Furthermore, many products incorporate numerous patented inventions (owned or licensed), and may carry exclusive trademarks, making it difficult to attribute a specific value to an individual patent. Would the same invention be as valuable if owned and marketed under a weak brand?^{[citation needed]}

In 2005, the European Commission published a comprehensive study of the value of patents for patent owners as well as for the European economy. The title of the survey was “Study on Evaluation the Knowledge Economy – What are Patents Actually Worth?” Ref. The study was in part based on a survey of 20,000 patent owners who filed EPO patents between 1993 and 1997. The survey was performed in 2003. 9000 patent owners responded. The patent owners were asked how much effort was required to produce their inventions and how much monetary value their patents had been worth. The median effort to create the patentable invention was 1 person-year, with 10% of the patent owners requiring 2 or more person-years. The median value of the patents produced was €300,000, with 10% of patent owners reporting values of €10 million Euros or more.

See also

• Business method patent
• Patentability
• Intellectual property valuation
• Software patent debate
• Sufficiency of disclosure

External links

• Economic Development and Patents and Competition and Patents on the WIPO web site