Economics and patents

Patent law
Overviews
Patents History Economics Societal views
Basic concepts
Application Prosecution Licensing Infringement
Patentability
Patentable subject matter Novelty Utility Inventive step and non-obviousness Industrial applicability Person skilled in the art Prior art Inventorship
Additional requirements
Sufficiency of disclosure Unity of invention
By region / country
Patent Cooperation Treaty Australia Canada China Europe India Japan United States
By subject matter
Biological (gene) Business method Chemical Software Tax
See also
Category Glossary

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.

Costs versus benefits of the system

Patent system is designed to encourage innovation. This is because patents, by conferring rights to the owner to exclude competitors from the market, offer the incentive for people to study new technology. In some field, it is also argued that the monopoly of the patent in the market will make sure the owner recover the huge expenses invested in the research and development phase.

While the patent system is designed to encourage innovation, the way it works can sometimes discourage innovation. First of all, because the cost of obtaining a patent is relatively low and the PTO’s issuance usually depend on looking at the “prior arts”, there are huge incentives for people to file patent applications early without themselves having any idea about the commercial significance of the patent in the application. As a result, many patent applications simply work as lottery tickets. They would apply repeatedly or file a series of applications on closely related technologies, in the hope that this would cover the technology that is widely adopted in the market in the future. This patent ticket lottery can have negative influence on other firms in the market. In some cases, firms could be investing in alternative technologies, only to find others registered the technologies as a part of the continuation patent practice before.

In addition, despite that USPTO tried its best to discriminate the validity and scope of a patent application, sometimes it will still issue a patent that should not be issued. The system corrects the mistake by maintaining the rights to nullify inappropriately issued patents. However, only very small fraction of the disputes ever went to court because of high litigation cost. A research paper by Mark Lemley and Carl Shapiro in 2005 showed that among 200,000 patents that are issued every year, only 1.5 percent of patents are ever litigated, and only 0.1 percent of patents are ever litigated to trial. This means the majority of patent disputes are either overlooked or settled privately. While private settlement is a good way to leverage the commercial interest between the firms, the public won’t benefit anything from it because there is no open discussion that would help clarify the scope of rights for that particular patent or no chances either in invalidating the patents so that it spreads the knowledge into the public domain.

Economics of probabilistic patents

Economists Mark Lemley and Carl Shapiro argued that we should rethink the patent granting process because there are inherent uncertainties with the system. Uncertainty in patents can be found in the two fundamental dimensions: 1) uncertainty about the commercial significance of the invention being patented, and 2) uncertainty about the validity and scope of the legal right being granted. Modeling the patents as probabilistic rights is helpful in bringing down the social costs of the system, while continuing to encourage innovation and technology dissemination.

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.

However, since patents essentially encourage innovation by giving owners the right to monopolize the market for a limited time, the public will suffer from the patents that are not innovative by paying a supracompetitive cost.

Another dilemma regarding the patent system’s effectiveness is that if the validity and scope were unclear at the issuance, it will always be corrected because other competitors will cause the case to the court and then we could either reevaluate the scope through discussion or invalidate the patent for public good. However, studies of the USPTO data showed that only very few patents are litigated to trial.

Farrell and Merges (2004) pointed out that two reasons have kept individual firms accused of patent infringement from challenging the patents holders. The first one is the public good problem, which means that once the patent is nullified, the competitors of the accused firm will benefit from the outcome. The other reason is the pass-through of the uniform royalty costs in the form of higher prices.

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, in the sense that a patent is not economically an "end in itself."^{[citation needed]} 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.

In certain cases, patents may be valued using the techniques developed for financial options, as applied via a real options framework. The key parallel is that a patent provides its owner the right to exclude others from using the underlying invention, so both patents and stock options represent a right to exploit an asset in the future, and to exclude others from using it. The patent (option) will have value to the buyer (owner) only to the extent that the expected price in the future exceeds the opportunity cost of earning just as much in a risk-less alternative. Thus patent rights can be thought of as corresponding to a call option and may be valued correspondingly. See Option pricing approaches under Business valuation for further discussion.

See also

• Business method patent
• Patentability
• Intellectual property valuation
• Software patent debate
• Sufficiency of disclosure
• Prizes as an alternative to patents

External links

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