THE ORGANIZATION OF INI)IIS'I'IIY

LER,

G.

j. "Monopoiy and Oligopoly lry Mrrlgcr""

Attrt'rlt:rtrr l"'t:rrtrrtrtrlt llttrt''

Vol. XL (May 1950).

..Economicsoflnformation,,'J.Politirxlllitxnnlny(jrrlrtll{Xil).

"Perfect Competition, Historically ConLernpla[c-d"' ibid' (Fcbnrary Univer1957). Reprinted in^Essays in thc Hisl'or1 of Economics Chicago: sity of Chicago Press, 1965. 1966' TLrc TheorY of Price.3d ed' New York: Macmillan Co., R. "New Issue Concessions on Municipal Bonds," l. Business, YoL Wnsr,

Chapter

il

NOTE

ON

PATENTS

XXXVIII (April 1965).

The production of knowledge (a compact' high-power' long-life battery, say)'difiers {rom the Production of a factory building or other common investment goods in three respects:

1. The (economic) outcome of research expenditures 2. 3.

is more uncertain than the outcome of expenditures on a building' The knowledge, once p-roduced, is usually or at least often cheaply 'by oiher enterprise which wishes to use it, in the appropriable "tty absence of legal barriers to appropliation. If the produ"I. is given sole iJsseision of the knowledge, a monopoly position is cqnferred. There may be 100 or 1,000 similar factories, Lut there are not (at one time) 1,000 discoverable difierent storage batteries, and PossiblY not two.

course, each of these differences between the production of knowledge and tangible capital goods is a matter of degree' The difierence of d"gt"" may even be minor for the uncertainty of outcome, since much new knowledge is produced to order and many tangible investments have highly uncertain economic outcomes' The difference in appropriability is larger, and that in the prospects for monopoly larger

Of

stiil, and we concentrate uPon these two difierences. The ease with which many pieces of r.rew knowledge may be aPpropriated by others presents at times a severe challenge to the owner of the knowledge in enforcing his exclusive rights. If the product carries the knowledge to every buyer, or if the process is capable of clandestine use, the producer of the knowledge may get only a,small portion of its-yield' The costs of enforcing patent rights probably have a signiffcant influence upon the directions and nature of research. The small costs of dissemination of knowledge once it is produced likens the production of knowledge to that of bridges-with the difference that wide use of the knowledge does not lead td .congestion. The economist who favors the free use of an uncongested bridle because the
123

24

THE ORCANIZATION OF INDUS?I7Y

lch,

111

A Note on

Patents

125

:tlstt lltr: lrctr marginal COSI Of another Passenger is zrrr'o llrIr'r'lotI I;tt'rtts sltttttl'r't' l,t lrt't' use;f new knowledge. Ii one 'irs1'r<,t't llt. r'lts. i:t .vt'tt ('\'r'tr trr()r,' lrrr,rlrV llrrrrr lrrirlllr':i use of knowledge: knowleclgc is pi,rl,,,l,ly _onecanbuilJabridgeth:rt will lrrrrr,ll,.,rrly l.o(11) l,r,t;r)rr,;rrl:r1,. 1.;1111 ' llr'i.1r,,.' is ttl;rt:rll1, .ltI t'||{lI irl ;rt..rlil'Iirttr. Ntt:;rtt.lt Pose' so an uncongestc.l'<l llttr iapacity limit resirlt's itr litr,rt'l''r11"' r'l lli. r.rlttr'l i,rt ,l lr;rrtxil.,t making of a storrt1r. Ir:tII.t1'

The ffxed term of 17 years, then, operates to reduce the rewards of a patent system rnore nearly to those of a competitive exploitation of new knowledge. If we use a 10 percent interest rate, a \7 -year annuity is worth

onc c:orrlrl llrr,ri.lilrI iill'il'. llr,rl iIr, trl,rt" '.ltilttl,l 1,,' tcrv:t|tlt:rl lly olrltrt ltl pt:rrnit Iump-srurr l',ritttl'; l.rllr, t llt'rrl l'f i' ltt"i\'t "tlrl' t"lti1t itt ll lr vilrlrlt: system of' tl'rci,r,.il,llt, ,l,'.rr',1'l' rrlrlilril.rl rr',r' r'l l'rrrt\\'t"lri'" to the IilrnP:.rrrrr t,.tiilll,i r.r1rr,rl 1,, llrr.r rrrrlrilrrrliilrr ol lt 1ti|t'r:0l' l<rrtlwlodge tl,'Visrrl, llrt:r't: WOUId be a gOOd t,,r rr t.ll'rt, I r ullrl 1,,' rr:rli.rr;rl lr,,lr devising r ;r',r' l0t il,lrrt' llt:rl ',\'t'li'ltt tirlltIt lltirtt PltlIrrls"l'lrc dilficulties of ,,1 llrrl srlt:iitl value of pieces of knowl, \,,1 rr llrlr.lt rrlrlr,r lllr, r'',litttitlls ,., 11,,-,i 1,. lrt ilr lllr.ili |r. I t,,tt','V,'t. knowledge, I lrr. rrrili|| tl|l,orItrr,irl (1il(lstion posed in the production of amount of resources in the Il,rr.,\'r'r, lr lrts, lo lrlirrg rLllout the correct .,1,,11r'lq l,r tr.ttr littowlcclgc' Does our Present patent system with its 17yr,rrr. 1,,rirrrt tll cxclusive possession of the knowledge bring folth approxirrrirlcly tlrc right amount of research efiort? We normally givE perPetual Possession of a piece of caPital to its maker and his heirs. Tfie reason is simple: the marginal social product is the sum of all future yields of the piece of capital, and if capital is to be produced privately io *here its marginal social Product equals its inarginal clst, the owner must receive all future yields' Why not the same rlrle for the Producer of new knowledge? The traditio;al formal answer' I assume, is that the new knowledge is usually sold monopolistically rather than competitively. lhe inventor of the safety razor does not have to comPete with 500 equally attractjve other new ways to shave, so he may charge a monoPoly price forhis razor' Note at once that this does not imply that inventors will do better on their investments in pr.oducing knowledge than other entrepreneurs do in producing tangible assets. The ProsPects of monopoly pricing will lead io s.,ch a scale of investment in producing knowledge that it will return only the comPetitive rate of tetutn on average' Thus with-a perPetual patent system too many resources would go into research and_ innovation, in this sense: the monopolistic sale of new knowledge would yield the same r.ate of return on resources as the competitive sale of other investment goods. How much overinvestment pgrpetual Patents would incite is q,r"rtior. of how much monoPoly the patentee on average obtains'

of a perpetuity, so implicitly our patent system assesses the ovr;rstimulation of perpetual patents at about 25 percent (that is 2.5 per' (:(]nL or1 capital) above competitive rates of return. 'l'l're monopoly element in copyrights is no doubt smaller: only a rt,rrlly rare author wiil sell after 20 years. Our 56-year patent system, by tlrc srrne annuity calculation, estimates the monopoly exploitation of a copylight to be about 0.5 percent above the competitive level. A reason,30 pcrcent

:rble figure.

"