Patent Economics II
Approaches to the Patent System
Class Notes: April 10, 2003
Law 677 | Patent Law | Spring 2003
Professor Wagner
Today’s Agenda
1. (Economic) Approaches to the Patent System
a) Patents-as-rewards
b) Patents-as-prospects
c) Patents to avoid rent dissipation
04/10/03
Law 677 | Spring 2003
2
Introduction to Patent Theory
Why is it important to have a (some?) theory of
the patent law?
• Illustrates policy questions
• Explains features of the law
• Suggests doctrinal interpretations, etc.
04/10/03
Law 677 | Spring 2003
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The Reward Theory of Patents
1. What is the most basic statement of the
‘reward theory’?
2. Why do you think the reward approach is the
most widely held view?
3. Why does Kitch suggest that the reward theory
is premised on:
a) The inevitable reduction of output of patented
goods
b) The balancing of output-reduction and outputincrease
04/10/03
Law 677 | Spring 2003
4
The Reward Theory
Kitch suggests a number of features of the patent
system that cannot be explained by the reward
theory:
1. The breadth of the claims
2. The requirement for early patenting
3. The divergence between when goods are patented
and when they become commercially viable (see
table on p. 272)
04/10/03
Law 677 | Spring 2003
5
The Prospect Theory
Kitch offers a alternative theory supporting the
patent system -- the prospect theory
1. What is the basic idea?
2. How does he analogize to the mineral claims system?
3. How does the prospect theory explain the puzzling
aspects of the patent law?
What does Kitch’s theory suggest about the public
benefits of patents?
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Is there a need to balance protection versus costs?
Are you convinced?
04/10/03
Law 677 | Spring 2003
6
The Prospect Theory
Kitch suggests several advantages of the patent
system when viewed as a prospect system:
1. Increases efficiency of resource allocation to
innovation
2. Generates incentives to maximize the ‘prospect’
(the invention)
3. Enhances the ability to contract for complementary
information
4. Enables signaling
5. Reduces costs of controlling technology
04/10/03
Law 677 | Spring 2003
7
The Prospect Theory
1. What are the problems with the prospect
theory?
2. How do Merges and Nelson suggest that broad
(‘prospect’) patents can reduce welfare?
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Consider the case-studies they note:
Electrical lighting
Automobiles and airplanes;
Radio;
Semiconductors;
Bulk chemicals;
Synthetics;
Pharmaceuticals;
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Law 677 | Spring 2003
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Prospect Theory
Consider the following:
1. Kitch is most concerned with controlling the overallocation of resources to innovation
2. M&N view the problem as avoiding under-allocation
of resources
3. But … can aspects of the patent system resolve both
concerns? (That is, perhaps the system is designed
to prevent both over-allocation and under-allocation
of resources.)
04/10/03
Law 677 | Spring 2003
9
Patent Law and Rent Dissipation
What is ‘rent dissipation’?
Grady and Alexander suggest that the patent law is
best viewed in terms of avoiding rent
dissipation. What do they mean?
• How does rent dissipation occur during the innovation
phase?
• How does rent dissipation occur during the
commercialization phase?
• What is rent dissipation due to secrecy?
04/10/03
Law 677 | Spring 2003
10
Patent Law and Rent Dissipation
G&A suggest that rent dissipation theory can explain the
following: (How?)
• Denying patent protection to ‘basic’ inventions, like principles
of nature;
• Offering broader protection where an initial innovation signals a
number of possible improvements;
How does the G&A theory suggest that more valuable
patents are less good candidates for protection?
What are the problems with the rent dissipation theory?
04/10/03
Law 677 | Spring 2003
11
Next Class
Patent Economics III
Cumulative Innovations & Patent Portfolios
04/10/03
Law 677 | Spring 2003
12