Incentive Theory
of Intellectual Property
William Fisher
June 22, 2004
© 2004. All rights reserved.
Intellectual Products are “Public
Goods”
• Can be used and enjoyed by an infinite
number of persons without being “used up”
• It is difficult to exclude people from access
to the good
Creates a danger that an inefficiently low
number of such goods will be produced
Possible Responses to Public-Goods Problem
(1) Government provides the good
-- e.g., lighthouses; armed forces
(2) Government subsidizes production of the activity
-- e.g., NIH funding for basic scientific research; NEA
(3) Government issues prizes
-- e.g., X-prize and associated shift in NASA policy
-- e.g., compensated expropriation of patents
(4) Government confers monopoly power on producers
-- e.g., 19th c. toll roads; intellectual-property rights
(5) Government assists private parties in increasing
“excludability”
-- trade-secret law; “direct molding” prohibitions; anticircumvention laws
Improved Knee
Brace
Improved Knee
Brace
Economic Conditions Created by the Grant of a Patent
$
Quantity
Economic Conditions Created by the Grant of a Patent
$
Marginal Cost
Quantity
Economic Conditions Created by the Grant of a Patent
$
Willingness and ability to pay of consumer X
P(X)
Marginal Cost
X
Quantity
Economic Conditions Created by the Grant of a Patent
$
Willingness and ability to pay of consumer Y
P(X)
P(Y)
Marginal Cost
X
Y
Quantity
Economic Conditions Created by the Grant of a Patent
$
Willingness and ability to pay of consumer Z
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
Aggregate Consumer Demand
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Q
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
Resultant Consumer Surplus
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Q
Quantity
Economic Conditions Created by the Grant of a Patent
$
In the absence of patent, copying and competition
will drive the price down close to marginal cost
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Q
Quantity
Economic Conditions Created by the Grant of a Patent
$
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
Profit-Maximizing Behavior by a Patentee
who can engage in perfect price discrimination
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
Profit-Maximizing Behavior by a Patentee
who can engage in perfect price discrimination
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
Profit-Maximizing Behavior by a Patentee
who can engage in perfect price discrimination
“Monopoly Profits”
P(X)
P(Y)
P(Z)
Marginal Cost
X
Y
Z
Profit-maximizing output
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
G
Marginal Cost
H
I
C
O
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
G
Marginal Cost
H
I
C
O
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
G
Marginal Cost
H
I
C
O
u
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Revenues
p
G
Marginal Cost
H
I
C
O
u
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Costs
p
G
Marginal Cost
H
I
C
O
u
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Profits
p
G
Marginal Cost
H
I
C
O
u
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
G
Marginal Cost
H
I
C
O
u
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
q
G
Marginal Cost
H
I
C
O
u
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
q
G
Marginal Cost
H
I
C
O
uv
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Revenue loss
p
q
G
Marginal Cost
H
I
C
O
uv
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Revenue loss
Revenue gain
p
q
G
Marginal Cost
H
I
C
O
uv
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Profits
p
q
G
Marginal Cost
H
I
C
O
uv
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
q
r
G
Marginal Cost
H
I
C
O
uv
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
q
r
G
Marginal Cost
H
I
C
O
uv
w
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Revenue loss
p
q
r
G
Marginal Cost
H
I
C
O
uv
w
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Revenue loss
p
q
Revenue gain
r
G
Marginal Cost
H
I
C
O
uv
w
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
p
q
Profit
r
G
Marginal Cost
H
I
C
O
uv
w
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
G
Marginal Cost
H
I
C
O
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Marginal Revenue
G
Marginal Cost
H
I
C
O
Quantity
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
D
B
C
O
Marginal Revenue
G
Marginal Cost
H
I
E
F
Quantity
Profit-maximizing price
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
D
B
C
O
Marginal Revenue
G
Marginal Cost
H
I
E
F
Profit-maximizing output
Quantity
Profit-maximizing price
$
A
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Monopoly Profits
D
B
1
C
O
Marginal Revenue
G
Marginal Cost
H
I
E
F
Profit-maximizing output
Quantity
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
Profit-maximizing price
$
A
Consumer Surplus
Monopoly Profits
2
D
B
1
C
O
E
F
G
Marginal Cost
H
I
Profit-maximizing output
Quantity
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
Profit-maximizing price
$
A
Consumer Surplus
Monopoly Profits
2
B
1
C
O
Deadweight Loss (foregone
consumer surplus)
D
E
3
G
Marginal Cost
H
I
E
F
Profit-maximizing output
Quantity
Applications of Reward Theory
• Assessing the merits and demerits of partial
price discrimination
• Assessing the merits and demerits of
compulsory licenses
• Determining the Optimal Pattern of
Entitlements (possible in theory, not in
practice)
• Posner’s “positive” account of extant doctrine
Applications of Reward Theory
• Assessing the merits and demerits of partial
price discrimination
• Assessing the merits and demerits of
compulsory licenses
• Determining the Optimal Pattern of
Entitlements (possible in theory, not in
practice)
• Posner’s “positive” account of extant doctrine
Partial Price Discrimination
$
Marginal Cost
O
Quantity
Partial Price Discrimination
$
Marginal Cost
O
u
v w
x
Discrete markets
y
Quantity
Partial Price Discrimination
$
p
Monopoly Profits
Marginal Cost
O
u
v w
x
y
Quantity
Partial Price Discrimination
$
p
q
Monopoly Profits
Marginal Cost
O
u
v w
x
y
Quantity
Partial Price Discrimination
$
p
q
r
Monopoly Profits
Marginal Cost
O
u
v w
x
y
Quantity
Partial Price Discrimination
$
p
q
r
s
Monopoly Profits
Marginal Cost
O
u
v w
x
y
Quantity
Partial Price Discrimination
$
p
q
r
s
Monopoly Profits
t
Marginal Cost
O
u
v w
x
y
Quantity
Illustrations of Price
Discrimination Techniques
• “Second Degree”: Offer 2 models:
– Regular for $250
– Premium (carbon-fiber) for $500
• “Third Degree”: Price varies by zip code of
purchaser’s residence
Figure 2.4: Market Windows from Release Date
Domestic Theatrical
Foreign Theatrical
Pay per view
Home Video
Pay TV
Foreign TV
Network TV
Syndication
0
1
2
3
4
Time in Years
5
6
7
Example of Partial Price Discrimination
Licensing first-runs in movie theatres
$
Licensing for pay-per-view
Licensing for home video rental
Licensing for network broadcast
Licensing for local broadcas
D
1
2 3
Marginal Cost
4
5
G
Quantity
Figure 3: Economic Impact of Partial Price Discrimination
$
p
q
r
s
t
Consumer Surplus
2
Monopoly Profits
1
D
O
u
v w
Marginal Cost
x
y
Quantity
Figure 3: Economic Impact of Partial Price Discrimination
$
p
q
r
s
t
Consumer Surplus
2
Monopoly Profits
1
3
D
O
u
v w
x
Marginal Cost
Quantity
y
Deadweight Loss
Figure 3: Economic Impact of Partial Price Discrimination
$
Consumer Surplus
2
Monopoly Profits
1
D
3
Marginal Cost
Quantity
O
Deadweight Loss
Figure 2: No Price Discrimination
$
Consumer Surplus
2
Monopoly Profits
1
E
3
Marginal Cost
E
O
Quantity
Deadweight Loss
Effects of Partial Price Discrimination on
Consumer Surplus
No price discrimination
Partial Price Discrimination
Relative Size of the Surpluses depends on how finely the copyright owner
can slice up the market
Effects of Partial Price Discrimination
 Enables Creators to Make More Money
 Reduces deadweight loss
 Indeterminate impact on consumer surplus
 Increases ratio between incentive for creativity
and deadweight loss -- thus enhances net
consumer welfare
 Increases the likelihood that all persons will have
access to works of the intellect
 Increases Transaction Costs
 Distortions caused by 2nd degree PD
alternatives
 Possible invasions of privacy
 Possible threat to cumulative innovation
Applications of Reward Theory
• Assessing the merits and demerits of partial
price discrimination
• Assessing the merits and demerits of
compulsory licenses
• Determining the Optimal Pattern of
Entitlements (possible in theory, not in
practice)
• Posner’s “positive” account of extant doctrine
Applications of Reward Theory
• Assessing the merits and demerits of partial
price discrimination
• Assessing the merits and demerits of
compulsory licenses
• Determining the Optimal Pattern of
Entitlements (possible in theory, not in
practice)
• Posner’s “positive” account of extant doctrine
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
$
Consumer Surplus
Profit-maximizing price
Monopoly Profits
Deadweight Loss (foregone
consumer surplus)
E
Marginal Cost
Quantity
Profit-maximizing output
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
$
Profit-maximizing price
Monopoly Profits
Deadweight Loss (foregone
consumer surplus)
E
Marginal Cost
Quantity
Profit-maximizing output
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
$
Profit-maximizing price
Monopoly Profits
Marginal Cost
Quantity
Profit-maximizing output
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
$
Profit-maximizing price
Monopoly Profits
Force Patentee to
License the work for reduced fee
Marginal Cost
Quantity
Profit-maximizing output
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
$
Monopoly Profits
Force Patentee to
License the work for reduced fee
Marginal Cost
Quantity
Profit-maximizing output
Figure 2: Economic Effects of Profit-Maximizing Behavior
by a Patentee
$
Force Patentee to
License the work for reduced fee
E
Marginal Cost
Quantity
Profit-maximizing output
Economic Impact of a Compulsory Licensing System
$
License Fee
Monopoly Profits
D
Marginal Cost
Quantity
Economic Impact of a Compulsory Licensing System
$
Monopoly Profits
License Fee
Deadweight Loss
D
Marginal Cost
Quantity
Economic Impact of a Compulsory Licensing System
$
Consumer Surplus
Monopoly Profits
License Fee
Deadweight Loss
D
Marginal Cost
Quantity
Effects of Compulsory Licensing on
Consumer Surplus
No price regulation
Compulsory license
Advantages of the Compulsory license will be offset, at least partially,
by administrative costs
Effects of Compulsory Licensing
on Incentive to Loss Ratio
• Reduce monopoly profits moderately
• Reduce deadweight loss substantially
• Increase administrative costs
May increase the overall ratio
Applications of Reward Theory
• Assessing the merits and demerits of partial
price discrimination
• Assessing the merits and demerits of
compulsory licenses
• Determining the Optimal Pattern of
Entitlements (possible in theory, not in
practice)
• Posner’s “positive” account of extant doctrine
Applications of Reward Theory
• Assessing the merits and demerits of partial
price discrimination
• Assessing the merits and demerits of
compulsory licenses
• Determining the Optimal Pattern of
Entitlements (possible in theory, not in
practice)
• Posner’s “positive” account of extant doctrine
Determining Optimal Levels of
Patent Protection
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
B
58/25=2.32
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
B
C
58/25=2.32
17/8=2.13
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
E
B
C
58/25=2.32
17/8=2.13
75/108=0.69
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
E
D
75/108=0.69
100/92=1.09
B
C
58/25=2.32
17/8=2.13
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
E
D
A
B
C
58/25=2.32
17/8=2.13
75/108=0.69
100/92=1.09
75/17=4.41
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
E
D
A
B
C
58/25=2.32
17/8=2.13
75/108=0.69
100/92=1.09
75/17=4.41
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
A
D
E
100/92=1.09
75/108=0.69
B
C
75/17=4.41
58/25=2.32
17/8=2.13
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
(3) Plot the sequence on a graph so that the line
corresponding to aggregate reward is linear
A
D
E
100/92=1.0
9
75/108=0.6
9
B
C
75/17=4.4
1
58/25=2.3
2
17/8=2.13
Determining Optimal Levels
of Patent Protection
(no patent protection)
Determining Optimal Levels
of Patent Protection
Reward to Producers
In the absence of any
patent protection
(no patent protection)
Determining Optimal Levels
of Patent Protection
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
Reward to Producers
In the absence of any
patent protection
Determining Optimal Levels
of Patent Protection
75
(no patent protection)
Aggregate Reward to Producers
caused by forbidding each
successive use
A
Reward to Producers
In the absence of any v
protection
Determining Optimal Levels
of Patent Protection
58
75
(no patent protection)
Aggregate Reward to Producers
caused by forbidding each
successive use
A
B
Reward to Producers
In the absence of any
patent protection
Determining Optimal Levels
of Patent Protection
17
58
75
(no patent protection)
Aggregate Reward to Producers
caused by forbidding each
successive use
A
B
C
Reward to Producers
In the absence of any
patent protection
Determining Optimal Levels
of v Protection
100
17
58
75
(no patent protection)
Aggregate Reward to Producers
caused by forbidding each
successive use
A
B
C
Reward to Producers
In the absence of any
patent protection
D
Determining Optimal Levels
of Patent Protection
75
100
17
58
75
(no patent protection)
Aggregate Reward to Producers
caused by forbidding each
successive use
A
B
C
Reward to Producers
In the absence of any
patent protection
D
E
Determining Optimal Levels
of Patent Protection
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
D
E
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
(3) Plot the sequence on a graph so that the line
corresponding to aggregate reward is linear
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
(3) Plot the sequence on a graph so that the line
corresponding to aggregate reward is linear
(4) Plot the corresponding levels of aggregate social
loss
Determining Optimal Levels
of Patent Protection
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
D
E
Determining Optimal Levels
of Patent Protection
(no patent protection)
A
B
C
D
E
Determining Optimal Levels
of Patent Protection
Aggregate Efficiency Loss
caused by forbidding each
successive use
(no patent protection)
A
B
C
D
E
Determining Optimal Levels
of Patent Protection
Aggregate Efficiency Loss
caused by forbidding each
successive use
(no patent protection)
A
B
C
D
E
Determining Optimal Levels
of Patent Protection
Aggregate Efficiency Loss
caused by forbidding each
successive use
(no patent protection)
A
B
C
D
E
Determining Optimal Levels
of Patent Protection
Aggregate Efficiency Loss
caused by forbidding each
successive use
(no patent protection)
A
B
C
D
E
Determining Optimal Levels
of Patent Protection
Aggregate Efficiency Loss
caused by forbidding each
successive use
(no patent protection)
A
B
C
D
E
Determining Optimal Levels
of Patent Protection
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
(3) Plot the sequence on a graph so that the line
corresponding to aggregate reward is linear
(4) Plot the corresponding levels of aggregate social
loss
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
(3) Plot the sequence on a graph so that the line
corresponding to aggregate reward is linear
(4) Plot the corresponding levels of aggregate social
loss
(5) Plot the efficiency gains associated with each
increase in aggregate reward
Determining Optimal Levels
of Patent Protection
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
(3) Plot the sequence on a graph so that the line
corresponding to aggregate reward is linear
(4) Plot the corresponding levels of aggregate social
loss
(5) Plot the efficiency gains associated with each
increase in aggregate reward
Determining Optimal Levels of
Patent Protection
(1) Ascertain the incentive/loss ratio for each of the
set of possible entitlements
(2) Arrange them from highest ratio to lowest
(3) Plot the sequence on a graph so that the line
corresponding to aggregate reward is linear
(4) Plot the corresponding levels of aggregate social
loss
(5) Plot the efficiency gains associated with each
increase in aggregate reward
(6) Plot difference between top and bottom lines
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Net impact on economic
efficiency of forbidding
each successive use
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Identify Highest Point
Net impact on economic
efficiency of forbidding
each successive use
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Assign these entitlements
To patentees
Net impact on economic
efficiency of forbidding
each successive use
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels
of Patent Protection
Efficiency Gains caused by
increased productivity induced
by each level of reward
Deny these entitlements
To patentees
Assign these entitlements
To patentees
Net impact on economic
efficiency of forbidding
each successive use
Aggregate Reward to Producers
caused by forbidding each
successive use
(no patent protection)
A
B
C
Aggregate Efficiency Loss
caused by forbidding each
successive use
D
E
Determining Optimal Levels of
Patent Protection
Very rough guidelines:
Grant to patentees entitlements that carry with them
large ratios – and refuse to excuse encroachments
upon those entitlements
Deny to patentees entitlements that carry with them
small ratios – or grant the entitlements but excuse
encroachments upon those entitlements
Applications of Reward Theory
• Assessing the merits and demerits of partial
price discrimination
• Assessing the merits and demerits of
compulsory licenses
• Determining the Optimal Pattern of
Entitlements (possible in theory, not in
practice)
• Posner’s “positive” account of extant doctrine