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
$
A
Marginal Cost
X
Quantity
Economic Conditions Created by the Grant of a Patent
$
A
B
Marginal Cost
X
Y
Quantity
Economic Conditions Created by the Grant of a Patent
$
A
B
C
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
Aggregate Consumer Demand
A
B
C
Marginal Cost
X
Y
Z
Quantity
Economic Conditions Created by the Grant of a Patent
$
Aggregate Consumer Demand
Marginal Cost
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
Marginal Cost
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
Marginal Cost
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
Marginal Cost
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
Marginal Cost
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
Marginal Cost
No incentive to innovate
Q
Quantity
$
Marginal Cost
Quantity
Figure 1: Profit-Maximizing Behavior by a Patentee
$
Marginal Cost
Quantity
$
Figure 1: Profit-Maximizing Behavior by a Patentee
In the absence of Price Discrimination
Marginal Cost
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
Incentive Theory as Applied to
Foreign Patents
• If country A grants patents to nationals of
country B,
• The various benefits stimulated by the
resultant incentive to innovate are realized
primarily by the residents of country B
• While the deadweight losses and other
efficiency losses are suffered exclusively by
the residents of country A
• (unless, perhaps, patentees can be required
to “work” their inventions in country A)