The Debilitating Effect of Exclusive Rights: Patents and Productive Inefficiency

Abstract

Are we underestimating the costs of patent protection? Scholars have long recognized that patent law is a double-edged sword. While patents promote innovation, they also limit the number of people who can benefit from new inventions. In the past, policymakers striving to balance the costs and benefits of patents have analyzed patent law through the lens of traditional, neoclassical economics. This Article argues that this approach is fundamentally flawed because traditional economics relies on an inaccurate oversimplification: that individuals and firms always maximize profits. In actuality, so-called “productive inefficiencies” often prevent profit maximization. For example, cognitive biases, bounded rationality, habituation, and opportunism all contribute to productive inefficiencies that harm individuals, firms, and ultimately society. Moreover, a variety of theoretical analyses and empirical studies demonstrate that robust competition reduces productive inefficiencies. Consequently, patents that substantially limit competition exacerbate productive inefficiencies, and an important effect of patent law has been systematically overlooked. This Article begins to fill this void and demonstrates that consideration of productive inefficiencies sheds new light on numerous unresolved and contentious debates in patent law.

Keywords: patent, innovation, efficiency, economics, neoclassical, cognitive, bounded rationality, experimental use, commercialization, claim construction, patent scope, patent office, examination, competition, rivalry, x-inefficiency, internal efficiency, organizational slack, technical inefficiency

JEL Classification: B13, D61, D21, D24, D4, D6, D8, K00, K33, K39, L1, L2, O00, O1, O3