The argument that patents motivate useful invention is unquestionably the most familiar theory about the economic function pf patents. Granting patents involves economic cost as well as potential benefits, therefore strong broad patents should not be granted light. Arrow (1962) indicated that the cost to society of granting a patent comes from the monopoly on the technology that the patent awards. Contradictory as one market failure (externalities, spill over effects) is counteracted by another (monopoly power). In some cases, notably pharmaceuticals charge very high prices for their patented pharmaceuticals. The fact that some monopoly is created is good reason not to grant patents when they are not needed to motivate invention even though in many industries patents do not seem to be very effective.
Another important cost of patents is that the holding of a broad patent by one firm in some cases deters other firms from trying themselves to invent and undertaking any of the wide variety of follow on inventive work that improves, or variegates, on an initial invention. On the other hand, the presence of a patent may force other firms if they want to compete in the broad product field, to work on alternatives that may be very different from what is already patented.
Patents therefore are granted if economically benefits exceed costs with the underlying assumption that patents are needed to provide firms with the ideal incentive to invest, and that it justifies the costs of the temporary monopoly position patients produce.
High-tech industries –except for pharmaceuticals – and industries that do little R+D deem patents ineffective to enable them t profit form their R+D. In such cases, it may be plausible to suggest that stronger patents might spur more inventing. An important limitation is that this focuses typically on large established firms with access to the complementary assets needed to commercialise the end product of their innovative efforts. They miss the interests of a small firm or organisations outside of an industry that may not be able to make advantage out of a head start. Perhaps for such firms patents are more important either as a means to appropriate returns through licensing or as a means to maintain control of the technology.
The above discussion draws a distance between inventing, and the follow on work that needs to be done to develop and commercialise new technology – outlining a different view of the functions served by patents.
The focus here is that clearly many patents are granted quite early in the innovation process, with a lot of follow on work needing to be done. The argument is that holding of a patent at an early stage provides assurance that, if development is technologically successful, its economic rewards can be appropriated. Accordingly it suggests importantly that patents induce firms to commit resources to the development of inventions.
The two functions of patents considered so far are not mutually exclusive they contain some fundamental differences. Principally, the theory considered here stress the role of the holding of a patent where the inventor needs to obtain development funding. This capability might be crucial for small and/or new firms faced with substantial development costs before they can get their inventions to market. Another distinction between the tow theories stipulates the situation where the firm that makes the original invention does not have the desire or the capability to carry it to market itself. Therefore, it stresses that the holding of a patent by the initial inventor may have been necessary for any licensing to occur.
A major difference between the theories sates that not only is the organisation that does early inventing work in a position to do the development work, but also, the invention itself would have been made without any patent in prospect. Hence, patents cannot be taken out on the further ‘inventing’ that is involved in development work, and that the results of such development cannot be made proprietary in other ways. These responses were for large incumbent firms and maybe this theory will be stronger if small firms are considered. Another justification for patenting already paid-for inventions is that the possession of a patent gives the original patent holding organisation incentive to push out its inventions to firms that can develop and commercialise them. There is increasing evidence to suggest that organisations advertise their inventions, which pr0ovide potential users with more and different information than would a simple scientific publication alone – this is the basis for our text theory of patents.
Under this theory patents are not necessary required to induce innovation but encourage disclosure by generating swift and expansive diffusion of the technical information underlying new inventions. Fundamentally, this theory focuses on commercially orientated investors that keep relevant information. The possibility of patenting the invention, however, lures the inventor into making the relevant information public. The modern era focuses on the speed, breadth and completeness of information disclosure or leakage. This theory also assumes situations where the inventor cannot exploit all possible uses and thus looks to attract the attention of other parties who can make use of the invention. However, the focus here is in the advertising value of patents with the thrust of the arguments in this theory towards wide spread licensing.
This leads us onto the last theory – where an initial discovery is seen as opening up a whole range of follow-on inventions. Under this theory the holding of a broad patent on a prospect opening invention permits the development of the full range of possibilities to proceed in an orderly fashion. Kitch (1977) proposed a controlling patent is necessary because ‘all’ will observe the same opportunities and therefore race for the same target and result in general over fishing.
In this theory, economic costs and benefits are viewed differently. For instance, under this ‘prospect theory’ there may be high social costs to granting a broad initial patent that gives monopoly rights on the search of the prospect: the number of diverse investors would decrease since their ability to work that invention would be constrained by the ability to negotiate a license with the holder of the original prospect defining patent. This suggests that the argument changes from costs and benefits of granting patents to the market for patent licenses. If potential licenses and patent holders have little difficulty in reaching a license agreement, then one believes that transaction costs are high and patent holders are prone to legal action, one may be less enthusiastic about this.
In general after all considerations, I believe the world economy will not benefit from a general broadening and strengthening of patent rights. In some areas, patent rights are economically and socially productive in generating invention, spreading technological knowledge and inducing innovation and commercialisation. However, in many areas of technology this is not the case. Firstly, the strengthening of intellectual property rights courts the danger of increasing litigation conflicts and costs in what merges and nelson 1990 call ‘cumulative systems technologies’. Second, broader and stronger patents lead to high barriers to entry for new firms. Also there is concern about the increasing tendency of intellectual property rights to be granted on discoveries that are a long way from practical application. Traditional the award of the patent has come after something useful has been achieved.
In summary, the case for stronger, broader patents is not persuasive as they entail major economic costs while generating insufficient additional social benefits. And some strong broad patents are simply counterproductive. Consequently one needs to be discriminating and cautious on this front.
