Intellectual Property and Competition

Research Handbook on the Economics of Intellectual Property (Edward Elgar, Peter Menell, David Schwartz, & Ben Depoorter, eds. Forthcoming).

U of Penn, Inst for Law & Econ Research Paper No. 17-36

U Iowa Legal Studies Research Paper No. 15-08

37 Pages Posted: 26 Feb 2015 Last revised: 23 Aug 2017

See all articles by Herbert Hovenkamp

Herbert Hovenkamp

University of Pennsylvania Law School; University of Pennsylvania - The Wharton School; University College London

Date Written: August 22, 2017

Abstract

A legal system that relies on private property rights to promote economic development must consider that profits can come from two different sources. First, both competition under constant technology and innovation promote economic growth by granting many of the returns to the successful developer. Competition and innovation both increase output, whether measured by quantity or quality. Second, however, profits can come from practices that reduce output, in some cases by reducing quantity, or in others by reducing innovation.

IP rights and competition policy were traditionally regarded as in conflict. IP rights create monopoly, which was thought to be inimical to competition. By contrast, competition policy values free entry and asset mobility, which IP rights limit in order to create incentives. Today our view of this relationship is more complex. First, most IP rights are insufficient to produce durable monopoly, although they do facilitate product differentiation. Second, we tend to see IP rules as creating a property rights system in which competition exists for the property rights themselves. Firms compete by innovating and appropriating whatever payoffs they are able to capture, including IPRs. Third, we define competition in terms of output or welfare rather than simple rivalry. A market structure or practice that increases output is more "competitive" than a lower output alternative, even though the amount of daily rivalry among firms is less. For example, output in the cellular phone market is much higher because hardware, software, and telecommunications links are all networked by cooperative agreements and standard setting.

Under conventional neoclassical assumptions, both innovation and competition increase output, whether measured by the number of units or their quality.

At the same time, however, excessive IP protection limits competition by reducing asset mobility further than necessary to facilitate innovation. Excessive antitrust enforcement can also limit asset mobility by benefiting select businesses at the expense of consumers. The policy trick is to find the "sweet spot" where the aggregate effects of IP and competition policy are optimized.

Keywords: intellectual property, patents, copyright, antitrust, competition policy, welfare

Suggested Citation

Hovenkamp, Herbert, Intellectual Property and Competition (August 22, 2017). U of Penn, Inst for Law & Econ Research Paper No. 17-36; Research Handbook on the Economics of Intellectual Property (Edward Elgar, Peter Menell, David Schwartz, & Ben Depoorter, eds. Forthcoming).; U of Penn, Inst for Law & Econ Research Paper No. 17-36; U Iowa Legal Studies Research Paper No. 15-08. Available at SSRN: https://ssrn.com/abstract=2569129

Herbert Hovenkamp (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
319-512-9579 (Phone)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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