Patents and Innovation

Viktor Nagy October 27, 2006

Abstract

1 Introduction
Have you ever wondered how valuable innovations are? Companies are paying millions of dollars to defend their innovations, we have complex patents systems, etc. We know that Edison and Ford became millionaires thanks to their ideas.(Boldrin & Levine forthcoming) On the other hand there are a couple of well known ideas, that are much more often used, and at the same time (or just for this reason) have a much bigger impact on our lives. Think just to the Internet (actually to its protocols) or to something else........ Sometimes we see even more interesting phenomena, like the dispersion of the VHS standard for video players and recorders. The Sony's VHS technology in its infancy had a big competitor, BASF's XXX(?). According to experts BASF's solution was technologically better, it had higher quality, and was not more expensive neither. Even in this case, as today's facts show, XXX have never been as successful as VHS. As some analysts (?) point it out this competition of standards was won by Sony's business strategy. While BASF was asking for all the uses of its patent, Sony let companies to build video players without patent fees. This way households could get the video player in the competitive marketplace for video players, while only rms (and households) wishing to have VHS writing possibilities needed to pay for the patent. This strategy won the battle for Sony, but at the same time, shows us two things. First, the non-restricting use of the patent gave Sony a competitive advantage. Second, there were thousands of companies, who even without owning the patent were ready to make business from it, just by producing video players. This second fact is an incontestable justication for

the burdens the patent system can cause.1 Firstly, as Sony's strategy shows it, there was no reason for the restrictions posed by BASF.2 Secondly, even if Sony already owned the patents, there were protable opportunities for video reader developers. No doubt todays video market would be quite dierent if only the XXX standard would exists, probably in lack of competition Sony would have had also a more monopolistic strategy. As the previous paragraphs suggest, the prot motive, and the monopoly rights supplied by patents does not seem to be the only reasons for development. In this article I will present a model that leaves place for two dierent motivating factors: the prot motive, and  without more suitable name, let's call it  the scientic motive. First I will start by showing some facts that underlie my choice of the scientic motive. In section 3 I will present my model that investigates the social welfare implications of these two motives. After I discuss the possible eects of a change in actual patents systems, and nally conclude the article.

2 The scientic motive

To be able to write anything about innovation, we should rst understand the researcher's motives. As economists are used to suppose the motive of prot maximization for rm's behavior, it would be probably a mistake to disregard it. But at the same time anyone working in the eld has to admit, that several (and probably the most inuential) innovations are held/put in the public domain. What does motivate the researchers and developers, if they can not enjoy the benets of a patented market power? There are some basic ideas on this topic, especially designed for the software industry (Lerner & Tirole February 25, 2000), but their conclusions are highly debatable (Weber 2004).
2.1 The literature

Searching for

psichology, sociology, economics

1 Hopefully
not arose. thanks to the competition of the rival technologies, the burdens here did

2 Even

if these restrictions are usual by patent owners.

articles. The benets of public domain researchers (Tim Berners Lee, etc). How do university patent centers work? (Why were they too agressive?)

3 The model
Suppose that there are two type of researchers in the population (research centers): one group is science motivated, while the other is prot motivated. If the innovative ideas are randomly distributed among the researchers, then basically both groups have the same chance to prepare something new. The main dierence between the two groups is, that science motivated researchers put they results to the public domain, and prot motivated researchers can use these results, while this generosity is not reciprocal. To have any research activity done, we have to assure that the invested costs are recovered by grants, new projects or on the market. With these assumptions we are going to build a basic framework to analyze the dierent properties and relations of the innovation market. While counting the social value of an innovation besides the R&D costs we have to take into account the marketing budgets too, if any. Do not forget about the possible use of patents once patent fees are paid. We would like to get answers to the following questions:

are scientic innovators as well rewarded as prot motivated innovators? probably not are there any chances to have only public domain innovation, once the basic innovation has taken place? if not, why not, what are the constraints

4 Conclusions References
Boldrin & Levine (forthcoming), lished.

Against Intellectual Monopoly,

Not pub-

Lerner, J. & Tirole, J. (February 25, 2000), `The simple economics of open source', NBER . Weber, S. (2004),

The Success of Open Source, Harvard University Press.

3