Private Protection of Patentable Goods

Abstract

Conventional academic, policy, and judicial discussions of patent protection assume that patents solve a classic public goods or market underinvestment problem. This assumption states that, without patents, potential innovators would expect to have no or highly limited means of preventing unauthorized third-party imitation and consequently, would have few incentives to develop innovations. I challenge this assumption both as a positive description of patent practice and as a normative basis for patent policy. As a descriptive matter, I show that a large body of empirical evidence strongly suggests that, with the exception of a few industries, firms often have legal and extra-legal means other than patents by which to appropriate the proceeds of their innovations and that patents tend to be the least effective means of doing so. In particular, firms that establish a dominant market position are generally able to appropriate significant innovation proceeds through various business strategies collectively referred to as the first-mover advantage: superior cost efficiencies, production methods, distribution and marketing networks, and brand image that are difficult for rivals to replicate. This finding has important and surprising normative implications. Whereas the conventional view states that patents cure an underinvestment problem in the market generally, I argue that patents cure an underinvestment problem among entrants (and especially small-firm entrants) in particular. For these firms, the patent system offers significant marginal exclusionary value to the extent that most informal and non-patent means of protecting patentable innovations (in particular, the various elements of the first-mover advantage) are by definition far more accessible to larger, established incumbents than to smaller entrants. Insofar as patents mitigate incumbents' natural appropriability advantage relative to entrants, they counterintuitively weaken rather than strengthen entry barriers and, in doing so, stimulate innovation investment by smaller firms that are often the principal sources of the most fundamental technological advances. This market-entry thesis is reconcilable with extensive patenting by large-firm incumbents insofar as a significant percentage of such large-firm patenting facilitates the incumbent's entry either into other concentrated markets or into knowledge exchanges and other joint ventures with competitors, in each case promoting technological advance and informational dissemination. This thesis also has significant implications for patent policy insofar as it cautions against introducing or expanding patent protection in markets where informal methods of appropriating innovation proceeds are widely available and, in particular, where such informal methods are available to a similar extent to both incumbents and entrants.